Vaccine tax hike underscores Treasury’s limited options – sin taxes should be on the table

The other options floated by Mogajane in media interviews include increased borrowing. “One way or the other we will have to bite the bullet,” he told 702 Talk Radio on Tuesday. 

Reallocation of funds or raising the budget deficit are other possibilities he flagged in an interview this week in Business Day. 

The Treasury is clearly in a very difficult space. The 2020/21 budget deficit was forecast in October to reach 15.7% of gross domestic product (GDP), while tax collection is expected to show a shortfall of almost R313-billion. And the renewed lockdown measures imposed in late December are weighing on commercial activity to such an extent that an economic contraction is seen in the first quarter of 2021 – following a 2020 contraction estimated at between 8% and 10% – which will further widen the deficit’s ratio to GDP. 

“It is difficult to see where else the funding could come from. Also, there are already lots of different calls on existing government resources,” Razia Khan, chief Africa economist at Standard Chartered Bank, told Business Maverick. Think of SAA, the Land Bank and other SOE flops. 

In response to queries from Business Maverick on the issue, the Treasury said: “Detailed financing measures, including any announcements on tax changes, will be announced on Budget Day in February.” 

The Treasury is clearly highlighting its dearth of options ahead of the February budget, which will be unveiled by Finance Minister Tito Mboweni, who would probably rather be fishing or growing pot on his farm. His job is unenviable, to say the least. 

“The fiscus is very constrained. So I think the National Treasury is clearly making the point that the money needs to come from somewhere – either taxes or spending reallocation,” Nazmeera Moola, head of SA Investments at asset manager Ninety One, told Business Maverick. 

Taxes may be the quickest route, but one with its own set of economic consequences. 

The small percentage of South Africans who pay taxes already have one of the highest burdens in the world in this regard. According to Trading Economics data, South Africa’s top tax bracket of 45% is among the 20 highest in the world, on a par with France and Germany, where it is probably safe to say that taxpayers get more for their buck. 

Higher taxes could curb consumption and investment at a time when the economy needs all the help it can get to generate jobs. On the other hand, the Reaganite notion of trickle-down economics copied by the likes of Donald Trump is also a bit of a scam. And this is an emergency that is unfolding in one of the most unequal societies the world has seen, so as a one-off measure South Africa’s affluent classes may well have to bite that bullet. The return in saved lives and ultimately a rescued economy will be huge.

A significant hike in sin taxes, with the proceeds ring-fenced for the vaccine, is one option worth considering. This correspondent has floated this idea before in these pages, and the case now seems more compelling than ever. 

The current third instalment of the prohibition on alcohol sales, like the previous two, was a response to hospital trauma units being overwhelmed by Covid cases and booze-related injuries. 

That is seen by many as commendable and part of the sacrifice we must bear, but it also has immediate economic costs: lost revenue for the Treasury, jobs shed, businesses shuttered and the plug pulled on R5-billion in planned investments by South African Breweries. So when prohibition is lifted, why not be proactive and hike taxes on booze and tobacco? The government clearly wants to curb consumption of these harmful products, and higher taxes is the easiest way to do so. It may also reduce the perceived need to use the blunt instrument of prohibition, which is frankly tainted by its racist and classist roots and history. 

Estimates for the cost of the vaccine rollout range between R12-billion and R20-billion. It’s probably also worth noting that this is a small fraction of the sums looted before, during and since the State Capture drama. If not for massive governance issues, South Africa could have afforded the vaccine without resorting to drastic measures like tax hikes. DM/BM