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Finance Minister Tito Mboweni says South Africa’s second-quarter gross domestic product (GDP) contraction is larger than expected by both the National Treasury and the Reserve Bank, increasing the risk that the GDP result for 2020 is worse than previously thought.
Mboweni said in an op-ed for the Sunday Times that the coronavirus pandemic has left government finances ‘dangerously overburdened’ while rising debt threatens the future economic prospects of the country.
“The reduction in economic activity in the second quarter has resulted in lower tax revenues, especially in the main income tax instruments and VAT, aggravating the precarious fiscal situation,” he said.
The minister said the economy is likely to contract more than the 7% previously forecast by the Treasury.
Mboweni said that tax revenue is expected to fall at a greater rate than the contraction in GDP, although this is by design.
“Businesses pay taxes only on profits, and as wages fall, effective income tax rates are reduced. The tax system is inherently countercyclical. However, income results will be even lower due to emergency measures to provide tax breaks and support to businesses and households during the crisis.
“There is still the risk that the weaker GDP figures will translate into a larger income deficit, although the vast majority of the reduction is already reflected in the estimates published in the supplementary budget in June.”
The finance minister said that the expected deficit of more than R300 billion, around 6.2% of GDP, means that the country will have to borrow more money.
“Not containing our huge debt and debt service costs, and reducing the budget deficit, will hurt the long-term economic outlook.”
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Meanwhile, rating agency Moody’s said the government’s loss of revenue will be much larger. serious than the decline in economic activity in South Africa.
In a research note on Thursday (September 10), Moody’s said that poor revenues have been a key credit challenge in the country for an extended period. At the same time, opposition from influential stakeholders, including unions, has limited the authorities’ ability to contain spending in response, he said.
The rating agency said the revenue shortfall will further complicate the supplemental budget’s debt stabilization target for 2023.
“The loss of income will be much more serious than the fall in economic activity. The lower tax base derived from the blockade measures, the loss of jobs and the lower confidence explain the vast majority of the income deficit, ”he said.
“The tax relief measures included in the government support package are a secondary factor in the loss of revenue.”
Additional tax measures
The National Treasury plans to raise an additional R40 billion in tax increases over the next four years with additional measures, such as a wealth tax proposal, that will help with this collection.
A proposal document submitted last week by Edgar Sishi, acting head of the budget office, to the National Council for Economic Development and Labor (Nedlac) shows that these R40 billion will be made up of R5 billion in collections in 2021-22.
The Treasury then plans to collect an additional R10 billion in 2022-23 and 2023-24 each, and R15 billion in 2024-25.
The proposal document, which has been viewed by Bloomberg, states that additional tax measures will be announced in February 2021, and that research and analysis are currently focused on wealth taxes.
In July, Sishi said that Treasury was considering investigative reports from the Davis Tax Committee on the possible introduction of new measures, including the feasibility of a wealth tax and how it relates to a land tax and estate tax.
“We are analyzing these recommendations. It is important to remember that the tax amendments of the last five years have included some of these proposals and we are analyzing additional proposals for the 2021 budget, ”he said at the time.
Mboweni has also said that the Treasury is discussing the possibility of an inheritance tax and a so-called solidarity tax in an attempt to raise additional funds.
Taxes on the rich are politically favored and a solidarity tax, associated with the virus outbreak, would have a limited duration. In South Africa, the maximum income tax rate is 45%, corporation tax is 28%, and VAT is 15%.
Read: Moody’s issues warning on reducing South Africa’s tax base
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