Key concepts: Tax, Government spending, Economic stimulus.
The Minister of Finance Tito started the 2021/22 fiscal year with good news for tax-paying agents who carry South Africa’s financial burden on their backs. In the 2021 Budget Speech, the minister announced tax reforms that intend to grant relief to taxpayers given that the Covid-19 pandemic has hit them hard.
Consumer spending is to receive a boost as the Personal Income Tax brackets are lowered by 5%. This means that the new taxable income is R87 300 and above. The 5% relief is higher than the inflation rate, which was at 3.2% as of February 2021. Social grants also increased, although by less than inflation. Corporate taxes will decrease by a percentage point to 27% in the 2022/23 fiscal year, although this figure remains significantly high compared to our BRICS peers.
The tax cuts announced by the minister were unexpected, considering that the economy has experienced a shortfall in tax revenue coupled with the rising government debt. The expectation was for the government to raise Corporate and Wealth taxes, among other taxable items, to boost revenue, given that the government now has more priorities due to Covid-19, namely; the Social Relief of Distress Grant, UIF & TERS facilities, and the Vaccine procurement fund.
However, the overriding aim is to aid the ailing economy to get back on its feet by boosting spending and aggregate demand in the short run. Ceteris paribus, an active economy will boost tax revenue, allowing the government to reduce its budget deficit and service its debt in the medium run. As the Minister tabled, the National Treasury aims to stabilize the Debt-to-GDP ratio to 88.9% in the 2025/26 fiscal year.
But there is no free lunch. To reign in government debt, while making provision for the new and pre-existing priorities, the National Treasury has had to either cut or reprioritize spending. As a percentage of the total budget, the priorities that will receive less funding are:
ü Basic Education
ü Peace and Security
ü Community development
ü Economic Development
ü Post-school education & training
While it will take a while for the tax reforms to filter through the economy, the social impact of the cuts and reprioritization of funds may take effect sooner. Ceteris paribus, will the medium-term benefits of the tax reforms outweigh the social impact of reprioritizations and cuts? Are the two shocks to the economy even comparable?
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Yours in Thoughtful learning,