Why SA’s Treasury is baulking at paying income grants

South Africa’s National Treasury has voiced its opposition to a campaign by the Department of Social Development and civil rights groups for stipends to be paid to millions of the country’s poorest citizens on permanent basis.

Extending a temporary R350 monthly grant that was introduced in 2020 to shield the vulnerable against the fallout from the coronavirus pandemic would cost at least R50 billion a year, the Treasury said in a document, which was penned ahead of next month’s medium-term budget policy statement and seen by Bloomberg. The only way to secure the money would be to raise taxes, incur new debt or reallocate funds, and none of those options were desirable, it said.

The Treasury refused to comment on the document because discussions on the October 26 budget update are still ongoing. These are its potential options for raising additional revenue and why it doesn’t favour any of them:

Raise personal taxes

The document outlines several scenarios for increasing the personal income tax take, by raising the marginal rates and not adjusting tax brackets to account for inflation. But individuals in South Africa already pay more personal income tax than their counterparts in peer countries, Australia and the UK, and increasing their burden would further erode the country’s competitiveness. Furthermore, previous tax increases didn’t yield as much revenue as anticipated, failed to narrow the budget deficit and may have hampered economic growth, the Treasury said.

Levy a wealth tax

South Africa already taxes wealth indirectly by imposing estate duty, donations tax and other levies. While a new wealth tax may help reduce inequality, in practice such measures raise limited revenue, are expensive and difficult to administer, and often lead to capital flight and discourage savings and investment, the Treasury said.

Increase value-added tax

VAT is the most reliable source of revenue and from a purely macroeconomic standpoint, increasing the rate would have a less detrimental effect on economic growth and employment than raising personal income tax, according to the Treasury. It estimates that raising the rate by two percentage points to 17% could generate R49.4 billion, although the measure may be somewhat inflationary in the short term. Labour unions have fiercely opposed VAT increases in the past, arguing that the poor are most negatively impacted.

Take on new debt

The Treasury is adamant that increasing the state’s debt burden, which currently stands at R4.2 trillion and costs about R306 billion annually to service, is a terrible idea. “Debt-service costs have become a binding constraint on the fiscus,” are the single-largest item of spending and are growing at a faster rate than gross domestic product, it said.

Re-prioritise funds

A number of projects across a range of government departments could be terminated or scaled back, but the potential saving would only amount to R21.2 billion, according to the Treasury. Delaying capital projects provides the biggest scope for reallocation — about R12.8 billion may potentially be realised. Another R2.4 billion could be saved by ending a peacekeeping mission in the Democratic Republic of Congo. While consideration could be given to merging some departments with similar mandates and doing away with others, the state may incur additional legal costs and administrative charges, and have to give severance pay to those who lose their jobs, the Treasury said.

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