The Financial Fiscal Commission has warned that government has no room for further tax hikes, and that further increases may actually end up hurting the economy.
Presenting to parliament’s standing committee on finance on Tuesday (5 November), the group said that South Africa is facing projected revenue shortfalls of R52.5 billion in 2019/20, R84 billion in 2020/21 and R114.7 billion in 2021/22.
“This warrants a sustained increase in required economic growth and employment to improve revenue collection for the government to meet its social-economic objectives,” it said.
“Scope for increasing government revenue by raising taxes is shrinking because more tax hikes are most likely to impact negatively on the economy’s performance and hence on revenue collection, as consumers are forced to economise on their purchases.”
The group added that significant gains from Personal Income Tax (PIT) are most likely to be constrained because of the limited buoyancy – meaning that the percentage change in GDP is now only exactly matched by the percentage change in tax revenue take.
“Therefore, additional increases in marginal tax rates of PIT could also have perverse incentives such as tax avoidance or evasion,” it said.
“If households feel the need to acquire public sector services privately (e.g. health & education), the increasing tax burden may become untenable.”
This aligns with Treasury’s revenue concerns which it outlined in its medium-term budget policy statement released at the end of October.
“Significant tax increases over the past several years leave only moderate scope to boost tax revenue at this time,” the Treasury said.
However, despite this limited scope, Treasury said that additional tax measures are under consideration to raise an extra R10 billion in fiscal 2021 – but did not provide any further details.
“Given the fiscal position we find ourselves in, all tax options need to be on the table,” said Chris Axelson, chief director for economic tax analysis in the Treasury.
Chief economist of the Efficient Group Dawie Roodt said these additional measures will most likely to take the form of an increase in personal income tax and possibly even a hike in VAT – depending on how serious the finance minister believes the current crisis is.