Taxes will also be the dominant theme in South Africa in the upcoming week, as the country prepares for the delivery of the Medium-Term Budget Policy Statement (MTBPS), says financial service company Peregrine Treasury Solutions.
The group cited the alarming rise in government debt, the ongoing financial burden of SOEs, and an ever-declining tax base which could result in the MTBPS being ‘less than popular’.
“Hard decisions are needed, and ratings agencies will certainly be watching. The dire state of South Africa’s fiscal position coupled with weak economic growth mean that the budgetary task is enormous, even before considering the cost of the economic recovery plan,” it said.
Peregrine said that South Africa is on the economic ledge, and analysts, ratings agencies and investors be watching for:
- Decisive action on the unbundling and turnaround of Eskom, as well as clear guidance on the plan of action for other embattled SOEs;
- The measures that government will be taking to reduce its debt burden;
- Policy certainty on topics such as land redistribution;
- Steps to address the bloated public sector wage bill;
While the MTBPS normally does not delve into tax details, this time around may very well be more tax-centric, said Peregrine.
Some of the new tax measures expected by analysts and economists include:
- A three-year temporary tax on high net worth individuals and companies;
- Permanent wealth and inheritance taxes over and above the current estate duties;
- Possible digital taxes.
“With so much focus on increases in taxes, especially on the wealthy, concerns are now creeping in over what tax threshold might actually see the wealthy exit the country in totality, or erode the prospect of companies and the wealthy investing and spending, leading to even more economic turmoil,” said Peregrine.
Peregrine said that finance minister Tito Mboweni faces a tightrope due to rising debt.
“The threat of a sovereign debt crisis is looming, as analysts expect that South Africa can face a debt crisis as early as 2024.
“The time for idealistic policies and the poor implementation of structural reforms are over. The minister has the unenviable task of making the hard and potentially unpopular decisions now if we are to remain in control of our own economic future.”
Tax revenue collection has been below forecasts for some time, compounded by the fact that the country is in a deep recession. Debt levels continue to climb, as does the unemployment rate, while state enterprises remain a tied to constant bailouts.
Currently, approximately three million South Africans account for 97% of the country’s personal income tax collected in 2019.
A 100-page document, seen by Bloomberg, warns that South Africa will not be be able to meet its finance ministry’s debt targets and it may be undesirable for it to attempt to do so when the economy is being battered by the fallout from the coronavirus.
The president’s Economic Advisory Council, who prepared the document, said spending cuts could hold back growth and have other adverse consequences.
Instead, the council proposes a number of tax hikes and changes be considered, including:
- Increases to the fuel levy and estate taxes;
- A three-year ‘solidarity tax’ that would increase taxes for higher earners;
- The introduction of a basic-income grant that could cost R243 billion a year and would necessitate tax increases;
- Pension funds and other private investors backing infrastructure projects if there is a clear pipeline for the next 10 to 20 years.
Finance minister Tito Mboweni has said he plans to arrest the increase in debt levels at 87% of gross domestic product in the 2023-24 financial year, falling to 74% in 2028-29, Bloomberg reported.
Without an intervention, the ratio could climb to 141% over the next decade, he said.