By Sydney Sekese, CFP® professional and FPI 2016 Media Award Winner
“Take the bitter with the sweet” these were the words that were uttered by the minister of finance as he delivered his budget speech last month. There were some burdensome impacts like increased fuel levy and sin taxes. On the other hand, individuals were reprieved as the minister indicated no increase in personal income tax brackets. The minister was caught between a rock and a hard place especially considering that 2019 is the national election year.
It is purported that the budget speech should turn out to be mildly positive for the economy over the medium term. The immediate positive news that followed afterwards was that inflation behaved well in January dropping by 4 per cent. Taxes affect many things from prices and profits to amounts of goods consumed and income received. This got me thinking about few matters that affect all of us.
Back to basics:
The “burden” of tax which is taken to mean a decrease in happiness, welfare, or money can be shifted from one person or group to another. For example if you are planning a holiday and a new fuel tax puts the airfare above the level you are prepared to pay; the tax could make you unhappy but not the airline company’s profits (this is food for thought).
The national budget speech is the government’s spending plan for the coming financial year. The minister of finance is responsible for allocating money to the government’s different objectives and programmes. The budget speech is important because it outlines the government’s priorities. It is also an opportunity for individuals to sort out their tax affairs to take advantage of the various deductions.
Who should pay taxes?
The fundamental thesis is that of fairness. This is the idea that those most able to pay should pay the most; that similar people should face similar taxes and that those who benefit from government spending should contribute to it.
A blatant reality in South Africa is that unemployment is one of the major drag to the fiscal environment; making it a challenge to collect the much needed revenue. A study by the South African Institute of Race Relations (SAIRR) indicates that unemployment in SA means that a massive percentage of our economically active population makes no productive contribution.
This means that they create no wealth and therefore do not pay taxes. They also do not contribute to housing, healthcare, food and transport. Instead they are carried by that tiny minority. For example about 4.7million people in South Africa pay taxes to fund some 17million people on social grants.
The government is aware of this conundrum and there are several steps taken to address this impasse. Some corrective measures to reduce unemployment could include the following:
- Monetary policy – cutting interest rates to boost demand
- Fiscal policy – cutting taxes to boost demand
- Education and training to help reduce structural unemployment.
- Implementing appropriate minimum wage to reduce real wage unemployment.
- More flexible labour markets, to make it easier to hire and fire workers.
The minister of finance provided some hopeful thoughts and mentioned that “It is time for us to sow the seed of renewal and growth”, this he said as he was holding the aloe plant whilst addressing parliament. It was believed to be a tough-talking, tricky Budget, full of difficult truths about an economy that’s spending more than it makes, and suffering under the burden of a bloated public service.