Pravin Gordhan’s 2016 budget presentation in late February seems to have pleased all and sundry. I could hardly find a negative pronouncement in the media. Deutsche Bank economist Danalee Masia’s comment encapsulated the general feeling, “It looks like a decent budget, far better than I expected.”
She continued “I am very pleased that they didn’t raise Vat because it would have had a negative impact on growth and undesirable consequences for the Reserve Bank.” All very well, but as an enthusiastic supporter of Vat, I’m pretty sure that a 1% increase in Vat would have, in these parlous times, been accepted as a necessary evil. But of course, with all the talk about a potential credit rating downgrade later this year, the big elephant in the room was not the why, what and how, but rather what is so desperately needed to avoid that dreaded downgrade – fiscal discipline, improved management of SOEs, and structural reforms/higher growth.
With minor tinkering of the tax base, and nips and tucks on expenditure, Gordhan managed to convince the pundits that this was not the time for a major overhaul of fiscal policy. Desperate times do not always call for desperate measures. However, I am in the minority. If it was up to me, Vat would have been increased to at least 18%. No, I am not crazy, I am merely a proponent of consumption taxes, because consumption taxes reduce income taxes, which encourages savings, makes tax evasion more difficult, and is a more efficient tax.
Of course, consumption taxes can lead to less tax collection, because people do tend to spend a bit less initially, but in the long run expenditure does return to “normal” levels. Not that I would call the crazy consumer driven society that we live in normal. Globally, economies are far too reliant on the consumer, and I think it would not be a bad thing that spending is reined in, and that debt levels come down. I remember when I was at varsity just before the Titanic went down, and our economics lecturer gave us an interesting assignment. We had to give our point of view about some research that a German economist had done, in which he calculated that the German economy would run very smoothly and efficiently with a Vat rate of 43%. This rate would kill the need for any other taxes, and would free up all the civil servants involved in tax collecting, into more productive jobs.
Pure nirvana, I argued, but of course with Germany at the time with an unemployment rate of some 4%, and with wages at relatively high levels, this could be considered. In South Africa, this would be political suicide, and Gordhan would not only have to endure a sustained #GordhanMustFall campaign, the end result would be something akin to the French Revolution, and the guillotining of the elite, en masse. Not a bad idea, actually, but of course, just not feasible.
Which leaves me as quixotic supporter of higher Vat rates, and a quixotic supporter of more production, and less consumption. One can dream that one day we will be in a position to move towards this goal, and that we can earnestly support the concept of vat (take) the btw (belasting op togevoegde waarde).