Local government is facing an increasing deficit and will likely have to turn to new revenue streams to cover the shortfall, suggests a new report released by the Financial and Fiscal Commission (FFC), adding that South African municipalities are in a ‘debt dilemma’.
The Financial and Fiscal Commission (FFC) is a body set up by the constitution to advise the Treasury on intergovernmental finances.
The advisory body has told the Treasury that local government is underfunded. It has noted that as much as 75% of local government revenue is generated through rates, taxes and tariffs for lights and water.
Municipalities, however, are owed over R50 billion, while they in turn owe creditors over R150 billion – far more than their total annual transfers, the FFC said.
These debt levels pose a significant risk to service delivery and specifically, the fiscal sustainability of the sector.
To combat this, the FCC has recommended that municipalities exploit other revenue sources including:
Weigh-in bridges in mining areas;
Amusement taxes; and
“Based on the survey results of 23 municipalities, and content analysis of both modern public finance theory and empirical studies, a list of potential revenue sources for local government was identified and subjected to a rigorous evaluation process,” the FCC said.
This involved testing the potential of each revenue source against a number of public finance principles for a ‘good’ local government revenue source. In short, the paper isolated development charges, weigh-in bridges in mining areas, advertisement levies, fire levies, amusement taxes and hotel taxes, it said.
“These revenue sources rank highly in terms of the five important criteria for a ‘good’ tax handle, i.e. criteria that underpin the principles of efficiency, accountability, transparency, fairness, and ease of administration,” the FCC said.
The advisory firm said that weigh-in bridges will enable municipalities to recoup part of the costs of infrastructure damage associated with haulage trucks, while fire levies can provide municipalities with revenues to deal with veld fires or repair infrastructure damaged as a result of fires.
While the report does not provide more information on what ‘amusement taxes’ may entail, historically such taxes have referred to tax paid on various forms of entertainment – usually expressed as a percentage of ticket prices. For example, on tickets to a concert or sporting events.
Amusement taxes are currently used in countries such as India and Malta and the US state of Chicago. Events sponsored by or for religious, educational, and other nonprofit organisations are usually exempted.
Overtaxed South Africans
According to data from Stats SA, personal income tax has become more important as a source of government revenue in recent years, contributing over a third of the R1.22 trillion in taxes collected by national government in the 2017/18 fiscal year.
Recent data published by the International Monetary Fund found that South Africans carry one of the highest tax burdens in the world, ranking as the eighth-most taxed nation out of 115 countries with substantial tax data.
South Africa’s tax-to-GDP ratio sits at 25.9% – far higher than the world average of 15.4% in 2017 and above the United Kingdom (25.7%), Australia (22.2%), Brazil (12.7%) and the United States (11.9%).
“For a nation that has a high ratio, but where taxpayers are receiving good value for money, a high tax burden might not be that detrimental,” StatsSA said.
“Countries such as Denmark, Sweden and Norway have high tax-to-GDP ratios, but these nations report the highest standard of living.”
South Africa does not fall into this category, however, with economists noting that consumers have reached their limit in what they can hand over to government – and further pressure through tax, would likely lead to a tax revolt.
While a full tax revolt (refusing to pay taxes) is unlikely in South Africa due to the way tax collection works in the country, experts have pointed out that a ‘revolt’ would rather play out through capital flight, loss of skills, and other avoidance measures.