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A research note from Momentum Investments, ahead of the 2020 Medium Term Budget Policy Statement, highlights South Africa’s tax collection problems on a shrinking tax base.
Tax revenue collection has been below forecasts for some time, compounded by the fact that the country is in a deep recession. Debt levels continue to rise, as does the unemployment rate, while state-owned companies remain tied to constant bailouts.
Currently, approximately three million South Africans account for 97% of the country’s personal income tax collected in 2019.
President Cyril Ramaphosa will present a ‘widely consulted’ South African Economic Recovery and Reconstruction Plan on Thursday 15 October 2020 in a joint hybrid session of Parliament.
The 100-page document, seen by Bloomberg, warns that South Africa will not be able to meet the debt targets of its finance ministry and it may be undesirable for it to try when the economy is being hit by the consequences of the coronavirus. .
The president’s Economic Advisory Council, which prepared the document, said the spending cuts could slow growth and have other adverse consequences.
Instead, the council proposes a series of tax increases and changes are considered, including:
- Fuel and estate tax increases;
- A three-year “solidarity tax” that would increase taxes for those who earn the most;
- Introducing a basic income subsidy that could cost R243 billion a year and would require tax increases;
- Pension funds and other private investors that support infrastructure projects if there is a clear portfolio for the next 10 to 20 years.
Finance Minister Tito Mboweni has said he plans to halt the rise in debt levels to 87% of gross domestic product in fiscal 2023-24, falling to 74% in 2028-29, Bloomberg reported. Without an intervention, the proportion could rise to 141% over the next decade, he said.
The bottom line is that South Africa is running out of money and time to tackle its financial woes.
South African Tax Service (SARS) Commissioner Edward Kieswetter, in a parliamentary presentation last week, highlighted poor economic conditions, low business confidence, and a lack of reliable electricity supply as some of the main contributors to the decline. of tax revenues that have been witnessed in recent years.
Kieswetter said SARS has also seen an increase in downsizing, lower pay deals, reduced bonus payments and slower growth in consumer spending over the year.
Economists at Momentum Investments noted that a stagnation in economic activity, triggered by lockdown restrictions, had a detrimental effect on government revenue, which has disappointed in fiscal year to date (YTD) relative to average the last five years.
“Meanwhile, spending trends were only slightly weaker as the government embarked on a countercyclical fiscal approach to prop up economic growth through public spending,” he said.
With a year-to-date annual growth rate of negative 20.6%, total tax revenue lags behind the last five-year average of 1.2%, but is only marginally lower than the negative 18.3% projected by the Treasury in the Supplementary Budget of June 2020, he said.
Meanwhile, total public spending is growing at an annual average to date of 4.2% compared to the last five years average of 7.4% and the June 2020 government estimate of 7%.
South Africa had the sixth largest fiscal stimulus response to the pandemic from its emerging market (EM) peer group and the second largest monetary stimulus (in the form of policy rate cuts), but the country still suffered the third worst contraction. of growth in the second quarter of the year compared to the peer group, Momentum Investments said.
This suggests a reduced effectiveness of the country’s stimulus response.
In its October 2020 Monetary Policy Review, the Reserve Bank of South Africa highlighted low and declining fiscal multipliers: change in GDP by a change in public spending.
“If public spending is paid for with higher taxes, the multipliers will tend to be low. Financing through debt can support a higher multiplier where debt is perceived as sustainable, ”the economists note said.
“Where sustainability is in doubt, more debt will tend to reduce capital inflows, raise interest rates for the entire economy and undermine confidence in the economic outlook, thus lowering the multiplier,” the economists said.
The underperformance in revenue has been largely broad-based, yet momentum appears to be picking up in corporate income tax (CIT) and value-added taxes (VAT), Momentum Investments said.
Citing the Revenue Service, he noted that the worst-hit sectors that contributed to corporate tax included finance and manufacturing, which were negatively affected by cargo shedding, depressed confidence and increased uncertainty.
On the other hand, the collection of personal income tax (IRPF) continues to struggle in the context of an accelerated loss of jobs and strong salary cuts.
The Personal Income Tax (PIT) is a direct tax on personal income that includes wages and salaries, directors’ fees, dividends, royalties and rental income, among others.
PIT reached 10% of GDP in fiscal year (FY) 2018/19, reaching levels last seen in FY1998 / 99. This is despite the fact that wage trends across the country have fallen, Momentum Investments said.
And, despite an increase in the number of registered taxpayers to 21.1 million in fiscal year 2017/18, the number of assessed taxpayers dropped to 4.9 million, highlighting a reduction in the tax base.
Of particular concern is that the SARS tax directives for staff reductions in 2019/20 reflected a total of 287,000 versus 239,000 the previous year.
This indicates an erosion of the tax base, especially for PAYE, as the 287,000 represent a number of PAYE taxpayers who will likely not contribute to the tax base for fiscal year 2020/21 unless they are reabsorbed into employment, SARS said.
Momentum Investments said that the Treasury will likely provide an update to its expectations for the fiscal buoyancy index that is currently above one (that is, indicating slightly more tax revenue per unit of GDP), as opposed to the average observed since the global financial crisis.
Fiscal buoyancy is a measure of the sensitivity of tax revenue to changes in economic growth, and it has been declining in recent years and has been exacerbated by the consequences of the Covid-19 pandemic.
In July 2020, the Treasury noted that it was considering the Davis Tax Committee (DTC) recommendations for a wealth tax, particularly with its ties to property rights and property taxes. “We don’t see this as a significant source of revenue, but it can be used, in our opinion, to pave the way for more broad-based taxes to fund growing societal needs,” said Momentum Investments.
Read: Proposed Tax Increase for South Africa
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