Unpacking the latest tax hikes in South Africa

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South Africa’s 2018 budget seemed to be all about tax hikes. The most significant was the first increase in Value Added Tax (VAT) since 1993 from 14% to 15%. Sibonelo Radebe asked Muneer Hassan to make sense of the tax increases.

What is your general impression of the budget speech?

The 2018 budget was predictable in that it was similar to previous years – expenditure rose, funded by an increase in taxation. What was notably different in this year’s budget is that the issue of fruitless and wasteful expenditure was in the spotlight. One new measure being proposed on this front is that state owned entities will be denied tax deductions for expenditure or losses that are classified as fruitless and wasteful.

To minimise the annual increase in budgeted expenditure, a reduction in cabinet expenses amounting to R85 billion over the next three years is proposed. This is a positive proposal which shows a serious intent by government to cut expenses where possible. It can also be taken as a hint that not only a cabinet reshuffle, but also a possible reduction in the cabinet number count, is on the cards.

What is your impression around the key tax announcements?

I was not surprised by the one percentage point increase in the VAT rate. South Africa is in a way catching up with other countries in the Organisation of Economic Cooperation and Development (OECD). Their average VAT rate is around 19%. And most African countries have a higher than 14% VAT rate.

It was also not surprising that the VAT rate was raised rather than personal income tax. South Africa has seen a decline in collections from personal income taxes over the past few years. This has been attributed to job losses, lower bonus payments and moderate wage settlements. This suggests that the personal income tax front may have reached a ceiling.

The VAT rate increase is further justified in that 30% of the wealthy taxpayers contribute 85% of total VAT collections.

And to shield those on the bread line from the increase, social grants were adjusted by more than inflation.

The concept of multi-VAT rate, differentiated rates for different items, was on the cards. But the idea was dropped because it was considered unfeasible – it would need additional enforcement to work properly and there is also a view that it could have created legal uncertainty.

Instead of multi-VAT rates, the budget proposed an increase in duties on luxury goods such as cars, smart phones and so on through the current ad valorem excise duties. These items are largely consumed by wealthier people.

What are the main drivers of these tax developments?

The main driver was the need to fund the tax revenue shortfall which stands at R48.2 billion for the current (2017/18) financial year, slightly lower than the projected amount of R50.8 billion. The reason for the shortfall is due to lower than expected tax revenue collections, which is directly affected by the employment numbers, company results and consumer spending.

In addition government is struggling with ever increasing debt-service costs due to slowing economic growth and against rising social expenditure needs. The budgeted debt-service costs for 2018/19 is R180 billion. Goverment’s borrowing space has shrunk. Sovereign debt has skyrocketed towards unsustainable levels over the past few years.

The tax policy proposals are designed to raise R36 billion in additional revenue. The increase in the VAT rate will bring in an extra R22 billion.

From a tax perspective, were there any missed opportunities?

I expected more relief for small businesses particularly on the ease of administration for these taxpayers. Small businesses of today are big businesses of tomorrow. Unlocking the potential of small business is therefore a vital stimulus to the growth rate.

Any other thoughts?

I think this budget was largely about increasing taxes through indirect taxes. The increases in VAT, fuel levy, environmental taxes, ad valorem excise duties are all indirect taxes. This leads to the tax burden being placed ultimately on the end consumer. In my opinion this is the easiest way to increase taxes without introducing additional administrative costs.

Muneer Hassan, Senior Lecturer in Tax, University of Johannesburg

This article was originally published on The Conversation.

The Zuma regime is dead. But its consequences will linger for a long time

Jacob Zuma.
Wolfgang Rattay/Reuters

The flood of obituaries to the Zuma presidency are likely to stream in for some time to come. But how should the nine-year period of President Jacob Zuma’s rule be understood in its historical and theoretical contexts?

We can answer the question by applying a theoretical lens that distinguishes between state, government and ruling party as three dimensions of politics. The state is the overall machinery of power comprising different institutions and practices. It tends to persist over time even when parties, politicians and cabinets shift. Government is a formal structure of ministries and policies which may change every few years. The ruling party is an actor that plays a role in running the government, depending on circumstances.

The balance between the three dimensions is not fixed. Together they form what is often called “the regime”. This refers not only to structures, policies and practices, but also to a less tangible “ethos” that gives sense of coherence to the entire set of institutional relationships.

The post-apartheid era has seen three terms of rule, dominated by the same party, the African National Congress (ANC). For most of the post-apartheid period they were led by three very different personalities – Nelson Mandela, Thabo Mbeki and Jacob Zuma. Each was governed by a different ethos: reconciliation and nation building under Mandela, and building a technically capable state under Mbeki.

So what was Zuma’s ethos, and how does the period of his rule compare to his predecessors’?

Different eras

The primary challenge for the Mandela government was to merge different political institutions and traditions into a coherent whole while maintaining social and political stability. The ethos of reconciliation dominated. This required a reformist approach – keeping the old style of management while gradually changing personnel and policies. An orderly but gradual shift of power was needed to ensure that the volatile environment did not get in the way of a new political order being built.

This approach ensured a peaceful transition. But it was also problematic. Many senior apartheid and Bantustan bureaucrats kept their positions. Even when they were replaced, their ethos and mode of operation prevailed.

With the transition to the Mbeki period, changes in state, government and party became evident. The primary challenge shifted from ensuring stability to enhancing modernity; from racial reconciliation to technical proficiency; from creating a unified state to making it efficient.

The new imperatives were centralising planning and designing and implementing policies. The idea of the “African Renaissance” served as a unifying ethos. But it had ambiguous effects. On the one hand it presented a vision of unity and development. On the other it led to racially-inspired delusions, as was the case with Mbeki’s AIDS denialism and his support for Robert Mugabe’s regime in Zimbabwe.

The biggest problem of the Mbeki period was that its attempts at centralisation excluded voices from the margins of politics and non-state actors. In turn this undermined the quest for policy effectiveness, a failure that was to serve as the background for the Zuma period.

Man of the people

Zuma’s appeal was due precisely to his being so unlike his illustrious predecessors. Neither a giant of the struggle like Mandela nor an aloof intellectual like Mbeki. Instead, he was seen as a man of the people. Not known for grand policy visions, he was expected to be pragmatic, seeking practical solutions instead of ideological purity.

His lack of commitment to specific policies meant that he was supported by opposing factions that thought him malleable. In short, a man for – almost – all people. Even his ethical transgressions weren’t seen as obstacles. They made him more human instead.

And human, all too human, he proved to be. Dispensing with the need to offer grand visions for the state, or claim competence in government, or manage the party with impartiality, Zuma used power to advance a single goal: self enrichment. The ethos was clear: grab as much and as fast as you can.

The strategy he adopted was to mix and match individuals and structures to serve the one goal. His approach had three components which he pursued systematically. These were to control:

• parts of the state that would help shield him from accountability, in particular the criminal justice system;
• aspects of government that facilitated access to resources: minerals and energy, state-owned enterprises, ultimately the treasury; and
• party institutions to neutralise opponents, particularly those who could undermine him.

The rest he discarded. Areas of government not directly relevant to looting resources received no attention. Left to their own devices, spheres such as education, health, welfare, public safety, housing, agriculture, water, were handled with no interference from the top.

Corruption and its aftermath

Corruption on a large scale preceded Zuma and is likely continue for a long time after him. The difference is that he opened the gates for political entrepreneurs to enrich themselves by creating looting opportunities.

The impunity that guided his actions permeated all state institutions. But there was resistance: within the state the court system remained largely intact and, in many cases, fought back as did the Public Protector. Large sections of the media, NGOs, the political opposition, and principled individuals all played a role. Enclaves within government – the Treasury in particular – continued to perform their role as long as they could.

Eventually the tide turned, heralding a new transition of power in the ANC. So, what lessons can we draw from a period that saw the state subordinated to the whims of a small number of people using it to their own ends?

One key takeaway is that free media and civil society voices, independent courts and accountability mechanisms, and honest politicians are all necessary. South Africa came very close to losing the battle against abusive and exploitative state power. The consequences of this will be with the country for a long time to come, which is why continued vigilance is essential.

Ran Greenstein, Associate Professor of Sociology, University of the Witwatersrand

This article was originally published on The Conversation.

South Africa must resist another captured president: this time by the markets

Cyril Ramaphosa addresses MPs after being elected president of South Africa.
Reuters/Mike Hutchings

The African National Congress (ANC) has made a dangerous habit of bringing post-apartheid South Africa to the brink of instability and the common ruin of all. The resignation of former President Jacob Zuma and his replacement by Cyril Ramaphosa was such a moment. It brought home the point that the over-concentration of power in the office of the president has clearly not worked.

A rethink on president-centred politics and the threats it poses to the democracy are crucial for the post-Zuma period. South Africa needs to re-imagine democratic practice, leadership and how power works.

Some sections of South African society have reduced the Zuma problem to a corruption problem. Dismantle Zuma’s kleptocratic network, the argument goes, and all is solved. Zuma’s demise and a few high profile prosecutions will suffice.

But another view on the Zuma problem – and one with which I concur – suggests it is a problem of contending class projects inside the ANC. The neoliberal class project under Presidents Nelson Mandela and Thabo Mbeki saw South Africa integrated into global markets. It maintained stability through modest redistributive reforms. This project laid the basis for a new black middle class to emerge while systematically weakening labour and the left.

But it surrendered the state (including the presidency) to transnational capital and the power of finance.

The Zuma project, on the other hand, advanced looting as the basis of accumulation and class formation. The extra-constitutional state that emerged deepened the macroeconomic, institutional and legitimacy crisis of the ANC-led state. The left and labour, aligned with the ANC in the tripartite alliance, were co-opted and divided. Both these projects are entrenched in the ANC.

Now what? Messiah-centred presidential politics is extremely dangerous. This is particularly true in a country of extreme inequality and with a formal concentration of power in the office of the president. If politics is not represented, thought and acted beyond this, South Africa is going to repeat historical mistakes.

Since the ANC’s December 2017 conference the media, the banks and international institutions have been talking up a narrative of the “Cyril effect”. Zuma’s removal is attributed to this. In fact the Cyril effect is a narrative of capture of South Africa’s new president by transnational and financial capital.

South Africa’s democracy cannot afford another captured president beholden to credit rating agencies, currency fluctuations, investment flows and business perceptions. South Africa’s democracy has to be grounded in the needs of its citizens and the mandates given by its Constitution.

The ‘Cyril effect’ is hyperbole

The end of Zuma was in fact not because of the Cyril effect. In the main Zuma was removed by the people’s effect which connected the dots of corruption, a mismanaged state and rapacious capitalism.

This resistance was expressed over 15 years through various institutions and social forces. These included:

• Battles inside the South African Communist Party (SACP) against Zumafication but which led to expulsions;
• By feminists during Zuma’s rape trial and subsequently through #RememberKhwezi;
• Artists and cartoonists lampooning Zuma, including with shower heads;
• The ongoing struggles in communities against corrupt officials;
• The Marikana massacre in 2012. This produced rage among workers and major realignments away from Zuma’s ANC;
• The call by trade unions like the metalworkers’ Numsa for Zuma’s removal;
• The Vukani-Sidikiwe campaign during the 2014 elections which opened up a national debate on how citizens should vote;
• The rise of #ZumaMustGo Campaign. This was in response to the sacking of Nhlanhla Nene as finance minister in December 2015. The NUMSA-led United Front played a crucial role in this;
• The #FeesMustFall movement. Students’ demands included labour insourcing as well as quality, decommodified and decolonised higher education;
• The 2016 local government elections. These were a harbinger of seismic political realignments against the ANC in key cities;
• The role of investigative and nonpartisan media in probing corruption scandals. And the publication of the Gupta-leaks as well as “A Simple Man” and “The President’s Keepers”;
• The courageous role from 2010 onwards of then public protector Thuli Mandonsela in drawing attention to ethics and legal violations by Zuma;
• Court decisions affirming the judiciary’s independence in relation to Zuma;
• Zuma’s miscalculation in firing finance minister Pravin Gordhan, the rallying of activists and the rise of #SaveSouthAfrica. What followed were some of the largest post-apartheid protest marches;
• The powerful voice of liberation struggle veterans like Ahmed Kathrada and others who called for Zuma to resign.

The ANC’s legitimacy crisis

As a result of all this activity the crisis of legitimacy in the ANC – and the ANC state – has deepened. This has placed immense pressure on the party to act. In this context, Ramaphosa is playing out his role out of necessity and to secure the ANC’s electoral fortunes.

For middle class and rich South Africans Ramaphosa’s state of the nation speech represented a return to normalcy – a democracy that works for a few. That’s not to say that the new president didn’t make some important announcements in his state of the nation address. This included his comments about state owned enterprises, redistributive state programmes and anti-corruption mechanisms.

Nevertheless, the speech struck chords that resonated with the “return to normalcy” narrative.

But South Africans can’t repeat the mistake made in 1994 when progressive civil society demobilised. The people’s effect has to continue to shape a post-Zuma democracy in the interests of all. The ANC has abused majority support and cannot be trusted with the future of South Africa.

People’s power has to be strengthened and continuously mobilised around strengthening democratic institutions, ending corruption, fundamental economic transformation and advancing systemic alternatives to the climate crisis.

Vishwas Satgar, Associate Professor, Department of International Relations, University of the Witwatersrand

This article was originally published on The Conversation.

Zuma's removal was a masterstroke: can it be repeated for the economy?

Negotiation was key to convincing Jacob Zuma to step down as South Africa’s president.
Reuters/Siphiwe Sibeko

The removal of South African president Jacob Zuma will be remembered for several reasons. One may be the gap between reality and what reporters, commentators and those who shape the national debate say happened.

There have been two South Africas over this period – one created by the echo chamber which dominates the public debate and the other in which millions live. There is no sign that this gap will narrow soon and so what South Africans read and hear will not be what most people experience.

This is a problem for the economy because business decisions which influence people’s ability to meet their needs may be taken on the strength of messages which are believed not because they are true but because they are the only story told.

The echo chamber insisted that a weak and vacillating ANC leadership allowed Zuma, a president widely rejected by citizens (the ANC’s vote share has declined by more than 20% under his watch), to dictate how and when he should go. It did this by trying to negotiate his departure rather than simply telling him to go.

This ignores the constitution and the real world of ANC politics.

On the first score, South Africa is a constitutional democracy, not a one party state. Presidents are chosen and removed by a Parliament elected by the people, not a committee of the governing party.

The ANC can ask a president to go but if the incumbent says no, only Parliament can force them. South Africa’s Parliament begins sitting in the second week of February; until then, the ANC could not remove Zuma. He was gone little more than a week after his removal by Parliament became possible.

If a company did something major which needed doing in little over a week, it would be hailed as a model of efficiency.

On the second, Zuma would not have been removed by the ANC unless those who wanted him out negotiated with him. Negotiation was essential because it was the only way in which to build enough support within the ANC to force him to go.

A point which seems lost on the echo chamber is that the ANC is deeply divided: two factions compete for power. One has supported Zuma avidly, the other wanted him gone. The new leadership was divided almost equally between them – those who wanted Zuma gone may have enjoyed no more than a two-vote majority in the ANC’s national executive committee, which runs it between conferences. A divided organisation which fires a president by a two-vote majority will face years of trouble and so Zuma could not go unless a much bigger majority was built on the national executive committee.

Factors that made things difficult

Two factors made this more difficult. Many in the ANC remember President Thabo Mbeki’s removal in 2008 as a traumatic event: it prompted a split and began the ANC’s slide at the polls. Even some who opposed Zuma may have baulked at treating him in the same way as Mbeki.

The ANC also spent decades being harassed by the apartheid government. This produced a tendency to stick together in the face of outside threats and to settle disputes internally. Using Parliament to throw out its own president does not fit well with this. Some national executive committee members who did not support Zuma may not have wanted Parliament to remove him.

So those who wanted Zuma out could not simply pass a resolution and be done with him. They needed a national executive committee majority so big that Zuma would be taking on not a faction but most ANC leaders. They could rely on some support from members who switched sides in the hope of gaining positions after Zuma went. But far more was needed.

Negotiation was the key. It impressed waverers by showing reluctance to repeat the Mbeki trauma. More important, Zuma’s opponents may have realised that he was likely to negotiate in a way that would alienate support. They presumably expected him to put himself before the ANC and the country: the more he did this, the more support would grow in the national executive committee for his removal and the more his options would narrow.

So it proved. Within the ANC, negotiation strengthened the anti-Zuma faction’s claim to care about the organisation. It revealed Zuma as a leader who cared far more for himself than the ANC. By the end, some of his most committed supporters were begging him to go.

There is nothing weak or vacillating about this. The faction which wanted Zuma gone read their options accurately and did what they needed to achieve their goal. They have also achieved changes –- a commission of inquiry into state capture, a board for the power utility Eskom which is widely agreed to want to run the company, not loot it, and police action against people accused of abusing public money, which few expected to happen this soon.

Hints of how the country will be governed

Why is this important for the country and the economy? The politicians who removed Zuma are likely to be running the government for the next five years. Current events were their first test and so they give a hint of how South Africa may be governed.

The echo chamber says they show that government will be weak and incompetent. The evidence tells a different story.

This does not mean that South Africans now know that government will do what needs to be done to restore the economy to health and improve living standards.
Current events do raise a crucial question about the new ANC leadership’s approach to the economy, but it is not the one which exercises the echo chamber. The question is not whether it can work out what is needed and get it done – it has shown that it can. It’s what it thinks is needed and what it is willing to get done.

The new leadership has shown great interest in the insider agenda – tackling the threats to the market economy which worry those who shape the debate. This means restoring the economy to the state it was in before Zuma: ensuring that government and markets operate as the rules say they should.

That is essential. But far more is needed. Unless the new leadership tackles economic exclusion, the problems South Africans associate with Zuma will remain. The key question is whether the new leadership believes that negotiating ways to include millions more in the economic mainstream is worth the same effort as removing Zuma – and whether they are up to this more difficult but more important task.

Steven Friedman, Professor of Political Studies, University of Johannesburg

This article was originally published on The Conversation.

What Ramaphosa needs to do to fix South Africa's foreign relations after Zuma

Cyril Ramaphosa being sworn in as the President of South Africa by Chief Justice Mogoeng Mogoeng.
GCIS

When President Cyril Ramaphosa sits down to brief a newly appointed Minister of International Relations and Development, he might wonder what to say.

Here are three suggestions which could help guide the conversation.

Strengthen diplomatic service

Extensive evidence suggests that a professional and well-trained diplomatic service is vital for the success of any country’s foreign policy. During the Zuma presidency South Africa’s diplomatic service has been aimless at best, and sometimes simply embarrassing.

Some of this has been caused by a failure to focus on the needs of professionals in the Department of International Relations and Cooperation. So, this will be a good place to start.

Since the Mandela presidency, transforming the diplomatic service has been a priority. This has succeeded in terms of racial equity, although some work remains to be done on gender equity. But this is not a straightforward issue. Not all countries are keen to receive women as foreign representatives.

Of course, this is no excuse: thinking and planning around this issue, especially at the managerial level, has to match the requirements for gender transformation within the country.

An effective diplomatic service needs a continuous training programme. Language and career-level training does take place within the department, but long-term career preparedness – from entry into the service to exiting it – has dropped away. Unfortunately, diplomatic training has been merged with policy planning , which has led to mission drift.

But the biggest obstacle to the development of a professional foreign service remains the issue of political appointments. All countries make these. But the operating principle is that they are limited, and made for strategic reasons – say, a well-connected individual appointed to a particular country to handle a specific issue.

In South Africa’s case, though, this has gotten entirely out of hand. Estimates are that some 80% of senior positions in South African missions abroad are occupied by ‘external non-career’ appointees. Many are casualties of the squabbles within the ruling party, the African National Congress.

Whatever the reason, the outcome has placed limits on the career prospects of the professional diplomatic corps.

Even more worrying is that many of these appointments have been made without due diligence. In the past few years, the dodgy backgrounds of a number of senior appointees have come to the fore. Besides embarrassing the country, it has undermined the professionalism of career diplomats.

Making use of a public process to select heads of diplomatic missions – along the lines of the Judicial Services Commission for the appointment of judges
may be a way forward on this issue.

Take BRICS seriously

The opportunities that the idea of BRICS – the grouping of Brazil, Russia, India, China and South Africa – offers the country is poorly understood. As a result, BRICS gets a bad press, especially in establishment foreign policy circles.

This is a mistake, and needs to be changed, because BRICS offers new ways to think about – and engage with – the rise of new powers in a changing world. For good or ill, the liberal global order that was established in the late 1940s has given way to new ways of managing world affairs.

Many obstacles stand in the way of BRICS as a political project, but the idea has opened up a pathway to a non-Western-centred way of understanding international politics. South Africa can help to shape this new thinking about the future, which should draw on the spirit of the decolonisation debate.

The issue of where South Africa fits into BRICS and what this means for the world should be steered by a Minister (and Ministry) who understand that the country must help to make international rules, and not simply abide by them.

The region matters most

Southern Africa remains the formal focal point of the country’s foreign policy. Unfortunately, this is not always acknowledged.

The politics of each individual country in the region weighs on the fate of this country. A simple measure of this is the number of citizens from the region who are living and working in South Africa.

The following example carries the point. In some circles, it is thought that millions of Zimbabwean are living in South Africa. The figures for the citizens of other countries in the region are probably in the same ballpark.

South Africa must respond to the migration issue by accommodation, not the fierce acrimony that has emerged elsewhere. The hard fact is that the country’s borders cannot be sealed off from its neighbourhood, the only solution on offer by security-centred analysts who, unfortunately, dominate the debate about the region.

Foreign policy is not only about security: it is mostly about listening and understanding.

For the region to be at peace, South Africa has to recognise that the borders that divide its people are, after all, colonial constructs.

Foreign Policy begins at home

These three issues may seem banal – after all, the debates about South Africa’s post-apartheid foreign policy have largely focused on big-ticket items like the African Renaissance, making peace in Africa, and reforming the United Nations.

But these high-flying ideas have missed an old truth, namely that foreign policy invariably begins closer to home.

Peter Vale, Professor of Humanities and the Director of the Johannesburg Institute for Advanced Study (JIAS), University of Johannesburg

This article was originally published on The Conversation.