Treasury Seeks Alternatives to Higher Tax to Fund Wages

by Sep 9, 2010All Articles

By Samantha Enslin-Payne

9 September 2010

Personal and corporate tax would not be raised to cover the higher-than-expected wage increase for public servants, the National Treasury said yesterday, but some economists have not ruled it out entirely.

Treasury chief director of communications Jabulani Sikhakhane yesterday said the details of what spending would be cut to cover the wage increases was still being worked out and would be announced in the medium-term budget policy statement on October 27.

The recent concessions the government offered public servants to end a 20 day strike will result in the estimated wage bill for 2010/11 of R294.4 billion increasing by R6.5bn

Sikhakhane said increasing personal or corporate tax was not an option being considered.

Azar Jammine, the chief economist at Econometrix, said the government would be reluctant to raise taxes because of the impact on the economy. But it was possible that it might increase taxes on the wealthy. A 1 percent increase in the top marginal tax rate could raise R3bn or more, he said.

But he said there was no imperative to raise taxes other than for political reasons to keep peace with Cosatu, which recently called for a tax on the super rich.

Raising taxes or cutting spending were not the only options. Jammine said the contingency reserve could be used.

According to the Budget Review, R6bn, R12bn and R24bn have been allocated over the next three years to fund events that cannot be foreseen, such as natural disasters.

“The government, from a short-term perspective, has plenty of scope to pay for wages because debt levels are low and revenue has overshot expectations,” he said. But he said the government had played it correctly by digging in its heels when it came to wage demands due to the longer-term impact.

But others think that the prospect of higher taxes is likely. Luke Doig, a senior economist at Credit Guarantee Insurance Corporation, said despite expectations that the projected fiscal deficit for 2010/11 might be lower on the back of improved revenues, the proposed public sector salary increases were very likely to lead to higher taxes.

“At the end of the day we will end up with higher personal taxes. I definitely think that the tax tables will be adjusted next year,” Doig said.

Dylan Buttrick, a tax specialist at audit, tax and advisory firm Mazars, noted that the government said it did not have the R6.5bn needed to pay public servants if the wage offer was accepted. “Ultimately the taxpayer could bear the brunt of the burden,” he said.

He said that in the past the Treasury had managed to expand the tax net to include more individuals and companies, as was evident from previous substantial budget surpluses that were also fuelled by strong economic activity.

He said a blanket increase of 2 percent across all taxpayers’ marginal rates would be a simple remedy to make up any shortfalls, but instead Treasury focused on alternative areas of tax, such as fuel levies, sin taxes and the new carbon emission vehicle tax, among others.

Buttrick said these types of alternative tax were not new, but taxpayers were increasingly subjected to the burden of funding a government that continuously failed to effectively match funding to service delivery and improved infrastructure.


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