Publications
Partners
Cape Town – South Africa needs to provide better tax incentives to specific sectors of its economy to ignite growth and create jobs, said World Bank Programme Leader Sebastien Dessus on Wednesday.
Presenting the World Bank’s report on South Africa’s economic outlook to Parliament, Dessus said research shows that the trade, agricultural, manufacturing and construction industries respond positively to tax incentives by increasing employment.
“Tax incentives to investors in these sectors will help to reduce poverty through job creation at no additional fiscal cost.”
The key to stimulating growth in South Africa is through private investment, Dessus said. “It’s the only leverage to increase growth, as private consumption is constraint by household debt, while public consumption and investment are constraint by a lack of fiscal resources.”
To calculate the return an investor will make on its investment, it’s important to consider the marginal effective tax rate, Dessus said. “For example, if you have a choice between investing in manufacturing or mining you need to look at the return after tax.”
In South Africa’s manufacturing sector a specific project will need to yield a 30% return if an investor is to make a 10% profit and in the mining sector where the marginal effective tax rate is close to 0% an investment needs to yield a 10% return in order to make a profit.
It’s therefore much more difficult to find a 30% return in the manufacturing sector, which makes it more unattractive for investors to invest in this sector.
“Re-orienting South Africa’s investment tax incentives towards trade, construction, manufacturing and agriculture would encourage private investment and increase job creation,” Dessus said.
National Development Plan targets ‘too high’
Asked what South Africa needs to do realise GDP growth above 5% as is mooted in the National Development Plan (NDP), Dessus said the NDP targets are too ambitious and need to be revised. “But there’s a lot of value in the NDP with regard to long-term planning and the objectives in it are extremely relevant.”
Dessus added that the World Bank is currently working with the National Planning Commission to be “a bit more selective” on what South Africa can do to realise its goals given its lower resources.
Ratings agencies
During question time, DA MP Malcolm Figg asked Dessus about his view on the newly established Brics ratings agency.
Dessus responded, saying he can understand countries’ frustrations with ratings agencies. “It’s not only in South Africa. Nobody wants to be told by private ratings agencies what the future will hold for your country.
“So, if the Brics ratings agency can do a better job of convincing investors (that your country is a sound investment destination) then that is fine,” Dessus said.
He added though that South Africa’s goal should not be to please ratings agencies, but to accelerate economic growth.
“You have to convince ratings agencies that you are can attract private investment. This is what they are looking for.”
Growth outlook
The World Bank estimates South Africa’s GDP to expand by 1.1% in 2017 and by 1.8% in 2018.
“But this is a forecast and GDP growth is subject to uncertainties and shocks,” Dessus said.
