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Treasury must look at alternative tax revenue streams - economist

Oct 16 2017 22:15
Lameez Omarjee

Johannesburg – The slow pace of growth in SA's economy means that Finance Minister Malusi Gigaba may have to consider additional “revenue taps” to plug budget shortfalls, according to economist Sanisha Packirisamy of Momentum Investments. 

In February 2017 National Treasury predicted GDP growth of 1.3% for 2017 and 2% for 2018. These figures have since been downgraded to just 0.7% and 1.2% respectively.

Ratings agencies, meanwhile, have also highlighted that low economic growth may affect SA's sovereign rating, said Packirisamy in a report.

“Treasury’s February 2017 growth forecasts appear to be too high, even in nominal terms after taking inflation into account,” said Packirisamy. "This low economic growth also leaves little room for the fiscus to make substantial moves," she said.  

Because of low growth, SA tax revenues will likely come up short. 

What are the options 

Packirisamy said that, while personal income tax and corporate tax rates in SA were higher than in other countries, VAT was much lower. Raising the rate of VAT could then help plug the projected revenue shortfalls. 

But increasing VAT is a “politically unpalatable choice” especially in the run-up to the 2019 national elections. Further, the Davis Tax Committee highlighted that increasing VAT would unduly prejudice poor households, estimating that a 1% to 2% increase in VAT could reduce real GDP growth by 0.2% to 0.4%, she said. 

Among Treasury's alternative options to raise funds are making use of medical tax credits.

Removing these tax credits could raise R20bn in additional revenues per year, which could help cover the health ministry’s priority programmes which amount to R69bn over four years, said Packirisamy.

A potential wealth tax is another option, but few developing countries have an annual tax on wealth she said. “Since this tax is targeted at a smaller number of wealthier individuals, collections are likely to be limited to between 1% and 2% of total revenues."

There is also a high probability of a fuel tax, which could generate R18bn in revenue. To lessen the effect on transport costs, Treasury could freeze or decrease the fuel levy. 

Distrust in SARS

Packirisamy said that multiple allegations made against the South African Revenue Service (SARS) may have eroded public trust in the institution, which could also negatively affect tax morality.

This may in turn add pressure to SA's tax revenue collection.

SARS has this year fallen short of its first-quarter revenue collection target by about R13bn, Fin24 previously reported.

The rate of tax collection is behind targets set in February 2017, while state expenditure is in line with trends at the same period last year.

Packirisamy said that government expenditure was growing at a rate of 6.9% year-on-year. This is just under the projected rate of 8.1%. If this persists, then the shortfall of expenditure would be R14.9bn.

“Treasury is likely to reprioritise a portion of its non-interest expenditure and may even announce further cutbacks in expenditure,” she said.

Packirisamy said that, at the currrent growth rate, tax revenue shortfall could be R51bn.

Last week the Old Mutual investment Group head of Economic Research Johann Els estimated that revenue shortfall would be around R50bn, and the current account deficit 4% of GDP for 2017.

Citibank, meanwhile, has estimated a shortfall of R33bn.

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malusi gigaba  |  credit rating  |  sa economy  |  budget
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