VAT forms as essential component of the tax system. In the 2015/16 financial year it accounted for slightly more than one-quarter of all tax revenue received by Treasury. In that year SARS collected R281-billion from VAT payments – more than three times the amount collected in 2003/4. However much of the value of this increase in revenue has been whittled away by inflation.
In real terms (i.e. compensating for inflation) VAT payments in 2015/16 where ‘only’ 84 percent higher than that of 2003/4. Over this period VAT receipts grew significantly faster than the economy did. Between 2003 and 2015 the Gross Domestic Product (GDP – a measure of economic activity) grew by 42 percent. By contrast VAT receipts grew by 84%. Given that the VAT rate remained constant at 14% over the period in question the growth VAT revenue has to be attributed to improved revenue collection and, possibly, greater expenditure on discretionary items.
As essential items like food are exempt from the tax VAT only impacts of those with discretionary income (money to spend on non-essentials). When consumers increase their expenditure on non-essential items total VAT revenue rises and increased VAT revenue can be taken as an indicator of increasing affluence. For this reason it is tempting to increase the VAT rate when the state needs more revenue. There has consequently been some speculation that tomorrows budget may herald an increase in the VAT rate – ensuring that those with discretionary income carry more of the burden of funding state services.
Increasing the current VAT rate from 14 to 15 percent effectively raises the current VAT rate by 7 percent. However this does not mean that VAT revenue will also increase by seven percent. The additional tax pressure will invariably reduce the amount of discretionary income available to consumers meaning that a higher proportion of their income has to be spent of essential items where no VAT payments is due. This will also suppress demand for non-essential items and, in turn, reduce the prospect of improved economic growth. The shortfall in revenue from a VAT increase will be particularly pronounced if consumers are already faced, as they are, with already stressed budgets.
The Minister of Finance thus has to balance the demands placed on the fiscus while ensuring that an environment conducive to economic growth is maintained. Increasing the VAT rate may be a particularly risky way of doing this.
A more effective way of balancing the budget may be to reduce the tempo at which state expenditure is growing. State expenditure has been growing at an ever faster tempo for some years. According to the Reserve Bank national Government expenditure amounted to 24.2 percent of GDP in 2003. This means that for every 100 Rand of economic activity that took place in 2003 national government appropriated 24 Rand. By 2015 that proportion had risen to 30.1 percent. This means that the proportion of economic activity appropriated by government had increased by a quarter in just 12 years.
However we will have to wait for tomorrow to see if the Minister can limit the growth of the state sector and, in the process, disappoints those expecting increased state support.
– By Michael O’ Donovan
