With the rising costs of ongoing corruption, the consequential costs of the pandemic, out-of-control zombie state-owned entities, the loss of excise taxes to the fiscus resulting from the cigarette and alcohol sales bans, and the disruption to travel and tourism, South Africa is likely to overshoot the revised deficit of R761.1 billion for 2020/2021.
While the Covid-19 virus spreads and mutates, the loss of lives and the impact on the economy will be felt for years to come.
Contingent liabilities arising from SOEs
State-owned enterprises (SOEs) present a spiralling fiscal risk.
Contingent liabilities are expected to reach R1 trillion by 2022/23 (according to the October 2020 Medium-Term Budget Policy Statement), stemming mainly from the financial woes of South Africa’s major state-owned companies.
SOEs are impacted by corruption, have poor internal control systems and rampant irregular expenditure. The government’s guarantee portfolio increased from R680 billion in March 2019 to R693.7 billion in March 2020. We will have to wait for the budget next month to see where it is sitting.
Many SOEs have ignored the October deadline for submitting their audited annual financial statements to Parliament. Where is the oversight and governance? Where is the consequence management?
Does the shareholder wait for a state-owned entity to default on a loan or bond before it realises that it is in dire financial straits?
Government has taken no action to rein in errant SOEs.
It is a fallacy that changing a board of directors will wipe out accumulated losses and accumulated irregular expenditure, and springboard the company into financial health.
South Africa is being fast-tracked into bankruptcy
Notwithstanding National Treasury’s view that SA is reaching its fiscal limits, in that increasing taxes will negatively impact growth, the country is being fast-tracked into bankruptcy.
Treasury may have no other option but to raise taxes.
Wealth taxes – annual versus one-off
The United Kingdom is considering a one-off levy on the wealthy. Its Wealth Tax Commission, comprising the requisite mix of skills in economics, tax law and administration, was tasked to gather the appropriate data and evidence, and to discuss and debate the design of a wealth tax. The ensuing report, ‘A wealth tax for the UK’, was published on December 9, 2020.
The commission concluded that an annual wealth tax in the UK would not work and that the existing taxes on wealth should instead be fixed.
It did however also conclude that a one-off wealth tax in the UK is feasible.
Is a wealth tax suitable for SA?
South Africa has rapidly rising unemployment. Pensioners, including those who are weak and ailing, queue for hours to receive their monthly government pensions.
Rather than take any accountability, it is politically expedient to raise a targeted tax on the wealthy.
South Africa already has wealth taxes such as capital gains tax (CGT), dividend tax, transfer duty, estate duty, and donations tax. Home owners and land owners already pay rates and taxes on property valuations.
Further, the South African Revenue Service (Sars) does not have the skill set to administer a wealth tax.
National Treasury should heed the UK Wealth Commission’s caution that: “Governments have made radical changes to taxes when there has been public understanding that change is needed.”
In SA, the criminals who have plundered the state and the poor obscenely display their ill-gotten wealth in the public eye.
Covid-19 has provided yet another opportunity for theft, which has destroyed the health service, put health care workers in harm’s way, and resulted in loss of lives. The procurement of Covid-19 vaccines remains an ongoing sordid saga.
A wealth tax will result in a far greater economic cost of diminished savings, and loss of foreign direct investment. There will also be a rise in tax-aggressive structures that will disguise wealth and earnings. There will be a continuing migration of wealth offshore and emigration.
“If you’re skating on thin ice, you might as well dance,” said American writer Anita Shreve.
And so our government dances – at funerals, at rallies, and on the steps of Parliament.