Some comments on the recent budgetby

Pieter le RouxInstitute for Social Development, SOG

University of the Western CapeFinance Committee, Cape Town

March 4th , 2003

Overview

• Future budget presentations should ensure inflation does not mask what really happens.

• Comments on some specific proposals.• The negative expenditure tax

Inflation leads to false claims made in budget.

• Tradition: Minister announces “increases” in social grants which are less than the inflation. In fact the grants are, of course, being decreased.

• This year increases in grants are fortunately real, but as much as half of the R15 billion tax relief would not have been possible if there was not bracket creep.

Recommendation

• This committee should recommend that in future budgets and revenue reports, the National Treasury should only claim increases in grants and other expenditures or decreases in tax levied if these are real and not just nominal changes, and that the real amounts rather than the nominal amounts are put forward.

Comments on specific proposal.

• Kaldor as advisor to Nkruhma: Excahnge control did not work – over-invoicing ad underinvoicing: High taxes, fear of nationalisation and fear of devaluation.

• Income tax lead to savings? Has promised much higher kick start effects that were not realised. It has also lead to more money going off shore.

• Usually better to give general company tax relief than targeted. Need to know more about the urban renewal before I could make a judgment whether this may be an exception on this rule.

Comments on specific proposal.

• Income tax relief not as disproportionately at the top as before, but we must realise that those who pay income tax are usually amongst the richest one fifth of South Africans.

• The issue that there is no capping on retirement provision needs to be addressed.

• Fuel levy sensible both for the exchange rate and environmental reasons mentioned.

Comments on specific proposal.

• Pensions increase strongly commended. But it only benefits one quarter of the poor families – the others do not have that benefit.

• Child grant the best option available now – but it does create poverty traps.

• Increases in service subsidies might be problematic, because it is difficult to target properly.

Income grant and indirect tax increases

• Why not rather lower VAT? If one does, more than 80% of the benefit will go to the top 20%.

• The international literature confirms that the poor is helped far more by not cutting VAT, but by giving higher grants.

• At the moment the only option is to extend the existing grants, and we must commend this choice – fully in line with what we on the Taylor committee recommended for this stage.

In future an income grant option financed by indirect tax.

• Three things important:• The net increase and the actual additional

burden is only one third the gross burden and is affordable. (R15 billion in 2000)

• 80% of the people will be better off.• One has to develop electronic money

delivery using the Hanis card, otherwise cost of delivery as high as benefit.

Conditional Support for income grant

• Only if financed out of indirect taxes is it affordable.

• Efficient delivery systems has to be developed linked to HANIS and electronic money – otherwise cost of delivery too high.

Socio-economic reasons important for government

• Only way to deal with destitution across the board, given extent of poverty and given middle management.

• Similar in net impact to OAG – also reaches other ¾• South Africa have unique requirements to make it

possible to launch this system here.• Complimentary to successful Public Works and Anti-

Poverty programmes.• Impact of latter limited, gender and geographic bias,

poor receives only small proportion.

Attraction for Economists• Efficient targeting• No poverty traps like conventional dole• Trade Unions likely to accept VAT increases if

earmarked for this purpose• Earmarked proportion of indirect taxes means that

expenditure levels are pushed up by three times the actual burden.

• Earmarking ensures that all benefit in prosperity, but pay price for bad performance.

• Earmarking effective anti-populism strategy.

Arguments for universal grant financed out of indirect taxes

• It can be extremely effectively targeted to benefit the poor.

• It is affordable, with net costs one third of the gross payments.

• It should encourage economic growth • It is a springboard for development, not

dependency creating dole.

The impact of a universal grant if financed by increasing indirect

taxes.

• Even though no bureaucrat knows our expenditure – indirect tax system plus grant targets effectively.

• VAT etc. is not regressive, as it is by itself.• Targets within households, women receives

¾ because children’s grant to care-giver.• Ms Clean L Green favoured (Sin Taxes)

Net grant and net cost (Household per person decile)

100 99 96 91 83 74 65 54 45 35 26 17 8

-144

-193

-290

-388

-632

-876

-95

-63-39-116

132027344148556269727576

-1000

-800

-600

-400

-200

0

200

Expenditure per person per month

Valu

e of

gra

nt/n

et c

ost

Net benefit of grant and tax increase, money notspent

Net benefit after grant is spent

Targeting % Impact Ms/Mr Average.

191%

91%

41%

25%16%

11% 7.4% 5.0% 3.3% 0.8%1.9% -8.4%

-7.8%

-7.3%

-6.4%

-5.8%-4.8%-3.5%-2.6%-1.2%

-50%

0%

50%

100%

150%

200%

250%

50 100 200 300 400 500 600 700 800 900 1000 1250 1500 1750 2000 2500 3000 4000 5000 7500

Personal Expenditure per month (R)

Effe

ctiv

e ne

gativ

e ex

pend

iture

tax

rate

s

Benefit or tax as % of expenditure

Discriminatory impact proportional increase in all indirect taxes

35 26

-39-62

-95

-144

-193

100 97 94 87 81 75 67 60 54 47 40 34

-75

-110

69

-66

-107

-149

-190

-250

-337

-425

4554657483

-16817

99 96 91

-16

-40

117

53

-33

-49

1

98 92 84

-1617

37

-500

-400

-300

-200

-100

0

100

200

0 10 50 100 200 300 400 500 600 700 800 900 1000 1250 1500 1750 2000 2500 3000

Average monthly expenditure per person

Ran

d pe

r m

onth

per

per

son

The Average Consumer

Ms Clean Living Green: Says noto alcohol, tobacco and pollution.Mr Tough Guy: To live is to drink,to smoke and to drive fast cars!l

\

Conclusion on targeting

• More efficient targeting than any existing means test. Amazed that has not been pointed out before in the literature – reasons why not in paper.

• Major benefit to those in severe poverty• Gender sensitive (woman also gets more)

Springboard for the poor

• Destitution can be wiped out.• R100 with 9% tax does not create poverty trap.• Women particularly likely to benefit from

automatic targeting.• Micro-finance for small companies• Travel costs to look for employment• Funds available for education/training• Help all 25-30 million poor.

Request to Committee

• Do not take final decision on income grant before• More sophisticated tax impact models are

developed– In addition to work done in department, we can draw on experience in DIW in Berlin, DAE in Cambridge.

• Delivery options must be thoroughly investigated.

Overall conclusions

• Generally a very good budget with most steps in the right direction.

• Inflation should be taken out of the picture to show what really happens with regard to tax and grants.

• Pleased that there a macro-economic investigation of the income grant is in planned. I wish to predict that the result will be a pleasant surprise to those who have been sceptic of this option

Financing crucial if it is to be affordable and well taxed?

• Can be financed by increasing– company taxes or.. – income tax or ..– indirect tax (Vat, excise taxes for example on

alcohol and tobacco, fuel taxes). • Can be paid by deficit expenditure

(government borrows or prints money).

Net tax burdens of different financing options

• Company tax: R52 billion (not targeted, everyone gets benefit)

• Income tax: R25-30 billion (not well targeted, benefits all not paying income tax)

• Indirect taxes: R15 billion (perfectly targeted)

• Deficit expenditure: No immediate burden, not targeted, but leads to inflation etc.

Calculations • (Total VAT, excise etc in R75 billion in 2001)• Vat increase and proportional increase other taxes: R39.3 bill

on Vat increase on existing expenditure R6.0 bill recouped when grants are spent

R6.6 bill paid to existing granteeR52.0 bill 7.4 % increase in Vat plus proportional increases in other taxes: 10.3% overall. (Impact 9-10%)

Net benefit and burden R15 billion , particular if better spending because of control by woman.

Proposed option

• In the next 4 years while modern delivery system are developed the expected greater efficiency in tax collection not given through as income tax reductions, but paid out as more for child grants.

• In 4 years time only 4% increase in Vat and proportional in other indirect taxes needed

• Earmark the required proportion increased indirect tax for grant.

Does not discourage own effort

• R100 per person (with 9% clawed back), does not create poverty trap.

• With Child Support Grant can loose R480 if wages go up from R890 to R910.

• Reserve wages go up.

Cost Effective Delivery essential• Smart Card ID with digitalised fingerprint

information preventing anyone from claiming twice available in few.years.

• The smallest little informal shop in rural areas needs to get reading machines. Grants downloaded as electronic money on card.

• Seems to be possible, but costs and efficiency needs to be investigated thoroughly before government can commit itself

Who is entitled to receive the grant?

• Every permanent resident individually entitled, but encouraged to claim together to save costs.

• Those who already receive other grants, e.g. disability or old age, should not also receive this grant.

• In case of children under 19, it is paid out to care giver – assumed to be the mother.

• Not a family grant, as proposed by DP, because that is regressive. (Rich gets more per person)

• No means test, everyone is entitled, rich or poor.

Differential Tax

  Break even point Effective tax rate

Ms Clean Living Green R1,508 6.6%

Mr or Ms Average R1,082 9.2%

Mr Tough Guy R603 16.6%

Income and Cost for government with direct expenditure tax

Expenditures:GrantCosts = Grant - tExp – (Grant-tExp)T ) if Grant> tExp, andIncome: ExpTax= tExp –Grant if Grant< tExp

In fact well targeted, even within households, to benefit the poorest

most and to tax the affluent

• Effectively we took per person expenditure as a proxy of poverty.

• Used a break even point just above R1000 per person per month.

• Anti poverty grant increased by about 9% below, expenditure tax by 9+% above.