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If the government reduced the Black Economy Empowerment Premium it pays on procurement contracts that unnecessarily drive up the cost of projects, goods and services, it could inject R150 billion in savings into the economy and reduce Value Added Tax (VAT) to just R11.5. can. %, new research suggests.
The Institute for Race Relations' (IRR) February report, Blueprint for Growth: Cut Waste, Cut Taxes, by Gabriel Close, says that approximately It is calling on the government to reduce BEE premiums, which are estimated to cost R17 billion.
This would improve corruption controls by an estimated R150 billion, of which R100 billion could be used to pay for reducing VAT from 15% to 11.5%, followed by further reductions in VAT or a general The company says it has the potential to reduce fuel taxes by about two rands. 0.20 per liter.
According to this year's budget review by the Ministry of Finance, 25.5% of total tax revenue comes from value-added tax.
“It is estimated that the first VAT cut will leave R31 billion in the pockets of the poorest 70% of South Africans and is likely to be spent much better than the government.
“International experience shows that reducing value-added taxes stimulates economic growth,” the report suggests.
The report notes that black businesses will directly benefit from a share of around R30 billion in VAT reductions due to improved governance and improved consumer demand, outweighing losses from lower BEE premiums. .
The IRR report finds that South Africa's national size and spending have ballooned, with the government paying higher prices for BEE contracts, while taxes are increasing and the value it provides to its people is decreasing. I am quoting.
“Since 2018, the average response rate to the question “Do you think things are moving in the right direction or the wrong direction in this country'' by the international opinion polling company Ipsos has been the highest in the negative? The target was South Africa.
“Our operating hypothesis is that the most serious direct cause of this negative outlook is unemployment, particularly black unemployment, which has approximately doubled in the BEE era since 2008.”
According to Statistics South Africa, the number of black unemployed people has almost doubled from the official definition of around 3.6 million to 7 million. Using the expanded definition to include those who have lost the desire to seek work, the number of black unemployed people nearly doubled between 2009 and 2022, from 5.4 million to 10.7 million.
The IRR report notes that from 2009 to 2022, public procurement was used as a key motive to promote black economic empowerment through premium payments.
According to World Bank data, South Africa appeared to have improved its anti-corruption efforts in the mid-2000s, but overall from 1996 to 2022 it had the lowest rate of relative corruption control among major sovereign constitutional democracies. experienced a significant decline. 2021 and 2022.
The country suffered the seventh worst decline in regulatory effectiveness from 1996 to 2022, according to the data.
The IRR said the Zondo report characterized corruption and state capture as “problems of legislative design”, specifically the “inevitable tension between preferential procurement, known as the BEE premium”, and “maximum value for money”. He pointed out that this was linked to the confusion of “. This confusion undermines accountability, the newspaper says.
“Treasury does not provide transparency or cost controls on BEE premiums,” the IRR report states.
According to Wits University economist and finance expert Adjunct Professor Alex van den Heever, the government has never systematically evaluated its BEE policy.
“There is no systematic analysis of the trade-offs between accelerating the delivery of value-based public infrastructure and bearing the costs of BEE projects. [to cut premiums] “We would need to include the unavoidable corruption costs of adding non-value-based discretionary criteria to tender decisions,” he said.
These costs are not only monetary, van den Heever added, but also include time delays in concluding kickback deals and reduced quality of the final product once it is delivered.
“The practice of providing upfront funding to small, inexperienced contractors to ‘help’ them build their capacity has evolved.
“But in reality, upfront fees allow contractors to walk away without completing a project. This outcome appears to be systemic, with many cities and municipalities Unfinished projects are becoming evident,” he said.
Van den Heever said his research shows that raising the value-added tax would have a significant negative impact on the economy, as the inevitable price increases permeate through the value chain.
“While VAT is a price increase and theoretically only targets added value, it does not necessarily reduce final consumption expenditure and therefore GDP.
“If governments efficiently restructure capital expenditures with a sole focus on cost-effectiveness, the obvious social and economic spillovers from BEE will significantly outweigh the opaque and indirect social outcomes,” he said. It's very likely.”
He believes it is difficult to defend BEE as a “social intervention”. Because BEE is “vulnerable to abuse, resulting in both social and economic outcomes being at best completely eliminated, or at worst resulting in a net reduction in public production, which is GDP.”
“Corruption resulting from the breakdown of proper procurement processes has led to the loss of millions of jobs and thousands of small businesses in South Africa due to failures in the procurement of public infrastructure. “We've halved the size,” he said.
“Domestic savings are not being channeled into domestic investment because political patronage is hampering large parts of the economy. No country can endure this for long. Well, it can survive, but you We will survive as Zimbabwe or Somalia.”
He added that while government spending is increasing as a share of GDP, the quality of what the government provides is declining “precipitously.”
“Government plays a central role in the performance of any country. But in South Africa it is a burden on society. It offers less but consumes more.
“The areas in which government intervenes appear to be driven primarily by patronage rather than public value. Potentially very productive parts of government lie dormant without active leadership.” said Van den Heever.
Professor Deborah Tickle, a tax expert at the University of Cape Town who served on the Davis Tax Commission, said cutting wasteful spending would be beneficial, but the report also called for the removal of the BEE premium and the cost of cracking down on corruption to free up funds. He stated that there was no mention of how this would be financed. It is usually procured with a 15% value added tax.
“South Africa has limited tax revenues and is highly indebted.Currently, more than 20% of Rand collected goes to interest costs before any form of tax or principal is repaid. It’s being met,” Tickle said.
She questioned how the government would meet its spending obligations if it reduced value-added tax, especially during the time lag between reducing government costs and realizing the benefits of economic stimulus.
As the report highlights, while value-added tax is technically a regressive tax, in reality the majority of value-added tax collected is paid by wealthy consumers with more purchasing power. Mr. Tickle said.
“As shown in the Davis Tax Commission Macroeconomic Report, taxes are an important aspect of wealth redistribution and once taxes are collected, they are generated through government spending in South Africa. ”
Data released last year by the South African Revenue Service and Treasury showed that in 2022, around 1.6% of the population, or just under 1 million people, had a taxable income of more than R500,000, but they paid around 80% of the full amount. was. personal income tax.
“The same people are probably spending and paying the bulk of the value-added tax,” Tickle says.
“South Africa's tax base is highly concentrated, leaving little room for Treasury to intervene.Interestingly, the Davis Tax Commission report notes that increases in value added tax are more likely than increases in personal income tax or corporate tax. We conclude that there is little distortion (to the economy).
“If the opposite is true, we need to test the IRR report's conclusion that the economy receives enough stimulus to offset the cuts.”
