Budget 2017: Choice between reducing deficit or growing economy

2017-02-22 13:11
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Cape Town - South Africa seems to have reached a crossroad, with the choices being economic growth or generating additional revenue, according to Tertius Troost, tax consultant at Mazars.

He notes that there is a global trend towards lower corporate tax rates, which has proven beneficial to both employment rates and economic growth.

“The Trump administration has vowed to significantly reduce corporate taxes in the US, and in the UK, Prime Minister Theresa May has also suggested cutting the corporate tax rate to as low as 15%,” says Troost.

According to Troost, these moves benefit the countries’ economies by allowing corporates to increase spending, grow employment numbers and ultimately make for increased collection of tax revenue from individual taxpayers. He adds that corporate tax rates for the highest income brackets in the UK and the US are at 20% and 35% respectively.

“South Africa’s corporate tax currently stands at 28%, which is considered high, and increasing this would impair the country’s status as an attractive investment destination,” says Troost.

“One country with a current situation similar to SA is Australia, where corporate tax is 30%. However, last year Australia’s National Treasury announced that corporate tax rates will systematically be reduced to 25% over the next decade.”

READ: Budget 2017: Experts share tax predictions

The rationale behind Australia’s decision is to make its companies more internationally competitive in a tough global market place. This is expected to yield a permanent increase in the size of the country’s economy of just over 1% in the long term, according to Australia’s Treasury Department.

The same trend is also being observed in countries like Finland, Denmark, Poland and closer to home, Botswana.

Troost points out that SA is not in a position to do the same.

“The issue with reducing corporate tax is that it takes a significant amount of time to produce any positive results for an economy. Given our country’s vast budget deficit, the short-term effects of this would only further increase Treasury’s shortfall. In addition, the high risk of a ratings downgrade will substantially increase the cost to finance South Africa’s budget deficit,” explains Troost.

“At the same time, Treasury has indicated that there is a dire need to stimulate economic growth. There seems to be an understanding within Treasury that corporate tax increases would erode international investor confidence. It will, therefore, be interesting to see whether Finance Minister Pravin Gordhan can find a way to help the economy grow without allowing government coffers to run dry.”

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