You tax booze, you lose: raising excise tax isn’t an option for finance minister

Finance minister Enoch Godongwana has a tough job to balance competing demands when he tables the 2022 budget on Wednesday.

Covid-19 and its impact on the economy have caused terrible hardship and lasting damage. Unemployment is at record levels and there is little reason to believe the job losses will be reversed, let alone that new entrants to the jobs market will ever find work.

For our youth, almost two thirds of them jobless, the future looks bleaker than ever. Yet we cannot give up on them. There is talk of a basic income grant, but how will it be funded, and for how long before the country’s shrinking tax base has been squeezed dry?

The government already runs a large budget deficit, which means it must borrow more. The cost of that debt is taking up an ever larger chunk of the budget, which means cuts must be made. Yet our education, law enforcement and health systems need more resources, not fewer.

How will Godongwana satisfy all of these needs when the pot of money he can draw from is growing slower than the need?

He may be tempted to raise taxes, but would this plug the hole?

The experience of the alcohol industry suggests it is not so simple.

Excise taxes on alcohol have been quadrupled since 2000, in the hope that this would encourage heavy drinkers to change their ways, but this hasn’t happened. Actually, per-capita alcohol consumption has stayed more or less the same.

What has changed is that the illicit alcohol trade has almost doubled over the past 10 years. The large and growing price difference between legal alcohol and illicit products — with illicit alcohol now about 43% cheaper on average — has been a big contributor to the growth in the criminal networks profiting from illicit trade.

Put simply, aggressive excise tax increases on alcohol have given the illicit trade a big competitive advantage, and the players in this market have been quick to take the gap.

The bans on alcohol of the past two years supercharged these underground networks by giving them an open field to grow, while legal businesses stayed shut.

And instead of collecting more taxes by increasing excise, the government has collected at least R11.3bn less as a result of tax leakages from the illicit trade, according to a Euromonitor report.

These may seem like abstract figures, but the pain is felt by people who have lost their jobs in the legal alcohol value chain, businesses that are unable to compete with illicit traders and local suppliers of inputs who are losing out to unregulated products which are either smuggled across our borders or made with an assortment of cheap, sometimes lethal ingredients.

The alcohol value chain supports almost a million livelihoods, and the alcohol bans have left deep scars. The industry estimates it will take up to five years to get back to the operational levels of 2019.

For taverners and shebeen operators, the growth in illicit trade creates a difficult choice: sell only legal products that are tax compliant and support local jobs, but are more expensive, or sell cheaper illicit products containing a variety of unknown substances.

Put another way, the choice is between being a law-abiding business while losing customers not willing to pay more for legal products or supporting crime.

President Cyril Ramaphosa has said the government should “create an environment” for the private sector to “unleash the dynamism of the economy”, but for the alcohol sector, this will not happen through another steep hike in excise tax.

Our economy will not grow, and we will not create jobs, if we make it so much more attractive to join the illicit economy than it is to trade legally.

The call to minister Godongwana from liquor traders is to protect the legal alcohol value chain by yet another sharp increase in excise tax which would only give the illicit traders another reason to celebrate.

Lucky Ntimane is convener for the National Liquor Traders.