If the government cuts the black economic empowerment premiums it pays on procurement contracts that wastefully inflate the cost of projects, goods and services, it can plough the R150 billion savings into the economy, allowing it to reduce value added tax (VAT) to just 11.5%, new research suggests.
The Institute of Race Relationss (IRR) February report Blueprint for Growth: Slash Waste, Cut Taxes, by Gabriel Crouse, urges the government to cut BEE premiums , estimated to cost about R17 billion per annum, to simplify procurement and improve transparency.
It says this will improve corruption control to an estimated R150 billion, of which R100 billion could be used to pay for a VAT cut from 15% to 11.5%, with either a further VAT cut to follow or a general fuel levy cut of about R2.20 per litre.
According to the treasurys budget review this year, 25.5% of all tax revenue comes from VAT.
The initial VAT cut is estimated to leave R31 billion in the pockets of the 70% poorest South Africans, where it is likely to be much better spent than by the government.
International experience shows that cutting VAT stimulates economic growth, the report suggests.
It notes that black businesses would benefit directly from a share of roughly R30 billion of the VAT cut, from improved governance and improved consumer demand, outweighing losses from reduced BEE premiums.
The IRR report cites research which shows that the South African state has ballooned in size and spending, and the government is paying inflated prices for BEE contracts, while taxes have increased and the value it offers to citizens has declined.
Since 2018, South Africa has had the most negative average response rate to international pollster Ipsoss question, Would you say things in this country are heading in the right direction, or are they off on the wrong track?
The operating hypothesis is that the most acute direct cause of this negative outlook is unemployment, particularly black unemployment, which has roughly doubled in the BEE era since 2008.
According to Statistics South Africa , black unemployment has almost doubled on the official definition from roughly 3.6 million to seven million. Using the expanded definition, including discouraged work seekers, black unemployment almost doubled from 5.4 million to 10.7 million between 2009 and 2022.
This was when public procurement was used as the main incentive to drive black economic empowerment by paying premiums between 2009 and 2022, the IRR report noted.
World Bank data shows that South Africa appeared to improve corruption busting in the mid-2000s but, overall, between 1996 and 2022, it suffered the worst relative decline in corruption control of any major sovereign constitutional democracy, with the worst year of decline being between 2021 and 2022.
It also suffered the seventh-worst decline in regulatory effectiveness between 1996 and 2022, according to the data.
The IRR noted that the Zondo report connects corruption and state capture to a problem in the legislative design, specifically confusion of the inevitable tension between preferential procurement, elsewhere known as BEE premiums, and maximum value for money. This confusion, it says, subverts accountability.
Treasury does not provide transparency or cost control on BEE premiums, the IRR report said.
According to Wits University economist and public finance expert, adjunct professor Alex van den Heever , the government has never appraised the BEE policy systematically.
There is no systematic analysis of the trade-off between expediting value-based public infrastructure delivery versus BEE project cost loading. In this analysis [to cut premiums
