Standard Bank chief economist Goolam Ballim has offered an arithmetical and philosophical case for government turning to value added tax (VAT) to bolster revenues in the current context of weak growth and an increasing necessity for fiscal tightening.

While acknowledging that raising VAT will be controversial, owing to the fact that it is not a progressive tax, he nevertheless argues that there is more scope to increase taxes on consumption than on corporates.

He points to an analysis that shows South Africa’s tax revenues as a percentage of gross domestic product (GDP) to be neither high nor low when compared with a peer group. However, Ballim notes that the country’s corporate-tax revenues are on the higher end of the spectrum, while its VAT rates are low when compared to its peers. Therefore, raising company tax rates could “render us uncompetitive”.

“Many would argue that when you target VAT it doesn’t have the progressive hallmarks of a capital-gains tax, or raising the marginal income tax rate. But it still stands out as a lever that government can pull,” Ballim argues, noting that a number of basic foodstuffs are already zero rated to protect poorer consumers.

The revenue raised would also be significant, with a percentage-point increase in VAT raising more than R16-billion, while increasing the marginal tax rate from 40% to 45% would boost revenues by between R7-billion and R8-billion.

Ballim argues that targeting higher consumption taxes could also be supportive of a rebalancing economy, which is currently weighted more heavily towards consumption than production – as a result the country’s current account deficit has risen to around 6% of gross domestic product, despite a material weakening in the rand.

A rebalancing would require the productive sectors to be stimulated through tax incentives.

“I’m for consumption taxes, because it will give us a better quality of growth outcome,” Ballim outlines, adding that the long-term multiplier of a rand of income directed to household expenditure is less than a rand, whereas a rand allocated to investment translates into more than R3-worth of long-term GDP.

But Ballim also stresses that there is also leeway for government to tax richer South Africans higher than is the case currently. This owing to the fact that taxes on the rich, particularly in Europe, have increased, which has raised the global threshold.

“It would be no surprise, therefore, to see some degree of fiddle to emerge on the capital-gains tax or even the marginal tax rate; it’s entirely politically consistent and just in light of the misdistribution of income in South Africa.”

Finance Minister Nhlanhla Nene is expected to signal the direction government plans to go in this area on February 25, when he makes his Budget address to lawmakers in Parliament.

In October, Nene indicated that, to facilitate a “structural increase in revenues” tax policy and administrative reforms would be pursued to raise at least R12-billion in 2015/16, R15-billion in 2016/17 and R17-billion in 2017/18.

Deliberations on the possible tax changes are to be guided by the Davis Tax Committee (DTC), which is led by Judge Dennis Davis. The DTC was established in 2013 to assess South Africa’s tax policy framework and its role in supporting the objectives of “inclusive growth, employment, development and fiscal sustainability”.