BUSINESS MAVERICK OP-ED: Little tax room to manoeuvre as Covid-19 pandemic triggers bleaker contraction

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South Africa’s growth outlook for 2020/2021 was bleak even before the Covid-19 pandemic. Now, with the contraction triggered by the pandemic, there is expected to be, at least, a 7.2% contraction in the South African economy, with widespread losses of jobs and livelihoods, food insecurity and business insolvencies – and a shrinking tax base.

The special Covid-19 adjustment budget painted a bleak picture of an already unsustainable fiscal trajectory, rapidly deteriorating further into crisis. Consolidated spending – which includes national and provincial departments, social security funds and public entities – will soar to R2.04-trillion, largely due to additional funding of R145-billion allocated for government’s Covid-19 response.

Cabinet has committed to actively stabilising the debt spiral at 87.4% of GDP in 2023/24 through targeting the achievement of a primary surplus by 2020 , instead of allowing it to ratchet up to 140% of GDP .This would entail spending and revenue adjustments of about R250-billion over the next two years, the details of which have been deferred to the Medium Term Budget Policy Statement in October 2020.

Given this dire state of the fiscus, progressive tax increases should not be ruled out. Wealth taxes are currently not administratively feasible in the short term given SARS capacity. VAT could raise some revenue, but would be regressive and is therefore not advisable. Nonetheless, the estimates are instructive and sobering – a 2% increase in the VAT rate would only generate about R40-billion in additional revenue.

In short, such increases would add much-needed legitimacy to the system, but would hardly be a panacea for the overall problem of the revenue shortfall.

 

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