Widen the deficit or Increase Taxes or maybe a bit of both?
So the SONA (State of the Nation Address) has been delivered. Earth shattering news it was not, predictable most certainly! Why do I say predictable.
Simply put Jacob Zuma’s speech writer put a together an address that acknowledged little in the way of short comings. It advanced more “plans” to improve the lot of the average South African and tried to leave you with the impression that everything was under control.
One financial observer noted that an additional 50 Billion rand is going to be spent to meet these plans. Now we need money to fund this and no mention is made as to where this money is going to come from. As we all know it can only come from the existing, already heavily burdened tax base or through the money markets.
If it does not come from that then it means we are going to have to run an even bigger deficit. Heaven only knows for how long and how deep into the red we will go. As with every deficit though it is going to need to be paid back!
One of the answers maybe be a bit of both. I would suggest that the government is going to look to increase the company tax rates and then run with a larger deficit. Why do I say this…..
The government will have a hard time changing the base tax rates, particularly when it comes to effecting the burgeoning middle class. Increasing the tax on the wealthly may be an option, but with one of the highest individual tax rates in the world, it will not be long before you have a major uprising.
So I think the least painful approach will be for them to off-set the rise in the deficit, by simply adding and additonal 1 or 2 percent to the company tax rates. What ever they are unable to cover through this will be “funded” through a higher deficit.
Anyway these are my views on this. What are yours?