Rising emigration a threat to South Africa’s shrinking tax base

Economists at Momentum Investments believe that growth in South Africa in 2020 will likely struggle to reach 1% on reform efforts they believe are too slow to suddenly reinvigorate sentiment.

In a note published towards the end of December, the economists said that while president Cyril Rampahosa has already triggered a number of reforms, they may be somewhat watered down against “a brittle growth setting”.

Momentum Investments cited the IMF which found that political costs can be minimised under more favourable economic conditions. South Africa, however does not have that luxury, it said.

When economies are stuck in a delicate growth environment, the IMF proposes “well-communicated upfront steps to offset such side effects” including strong social safety nets and active labour market programmes.

The IMF emphasised the importance of garnering the support of business and civil society under formidable economic settings and acknowledged that “a key ingredient to make structural reform work, is strong ownership and enhanced dialogue with business and civil society”.

The need for a social compact in South Africa, where all stakeholders concede to enduring some of the short term pain has never been more urgent.

“Without this, kick-starting growth and moving our growth potential from around 1.5% currently assumed, to the historic average of closer to 3% will be tough,” the economists said.

Weaker growth

Momentum Investments said that weaker nominal GDP and lower tax compliance have led to another year of disappointment in government revenue collections.

It added that a recent Unisa paper found that “the perceived quality and legitimacy of the tax administration and satisfaction with government service delivery” are determined that corrupt tax officials diminish the moral justification for taxpayers to act with honesty and integrity”.

As such, efforts being made at the South African Tax Revenue Service to prosecute cases of misconduct and to close loopholes in base erosion and profit shifting are critical in addressing taxpayer compliance.

Momentum Investments also noted that rising emigration poses an additional threat to a shrinking tax base.

Citing financial services group, HSBC, Momentum Investments said that 10% of households in South Africa account for more than half of consumption.

HSBC said that 55% of migrants in OECD countries are highly skilled, which will add pressure to growth, consumption, and tax collection.

Reform efforts

“While Sars efforts to bolster revenue growth may take time, there is pressure to reduce government expenditure, in particular, the wage bill, where for every R1 of government expenditure, 35 cents is earmarked for civil servants salaries,” Momentum Investments said.

It added that the government’s interest bill also remains a drag on the fiscus, as do ailing state-owned enterprises. Financial woes at energy utility, Eskom, place a heavier burden on government finances, Momentum Investments said.

It said that a sovereign downgrade by Moody’s is probable in 2020, should government fail to generate R150 billion more in the next three years through wage bill cuts, the sale of non-core assets and, as a last resort, revenue measures, the economists said.

Weak passthrough suggests little upward pressure on inflation, which is expected to increase from an average of 4.2% in 2019 to 4.6% in 2020.

Momentum Investments said that a further interest rate cut of 25 basis points is likely in 2020, “but this will depend on government’s ability to plot a credible path towards fiscal consolidation and a realisation of lower growth and inflation prints relative to the SA Reserve Bank’s.”

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