Government spending is too high for South Africa’s tax base – and the problem is not going away: Treasury

Government spending is too high for the tax base – and this gap has likely increased as a result of the 2020 recession, National Treasury said its annual performance plan published on Wednesday (17 March).

The gap between revenue and expenditure has increased significantly in 2020/21, increasing the main budget deficit to 12.3% of GDP, Treasury’s data shows.

“Large adjustments to government spending are therefore required to return the public finances to a sustainable position. In addition, the impact of the Covid-19 pandemic economic contraction on South Africa’s public finances will be felt for years to come.”

Treasury said that gross debt is projected to reach 80.3% of GDP in the current fiscal year, stabilising at around 88.9%  in 2025/26.

“Additional fiscal pressures from the broader public sector – including state-owned companies, social security funds and municipalities – remain unresolved.

“The fiscal trajectory is a major source of uncertainty and, along with unresolved structural reforms, keeps South Africa’s risk premium elevated, and thereby pushes up borrowing costs for the economy as a whole.”

While uncertainty remains around South Africa’s fiscal pressures, Treasury has committed to better tax collection.

“To improve fairness in the tax system, over the medium term, the department plans to propose amendments to tax policy that seek to meet government’s revenue requirements and eliminate tax loopholes,” it said.

In working towards this, the Treasury said it will conduct research on appropriate tax designs for all proposed amendments, prepare discussion documents, hold workshops and meetings with affected parties, and prepare draft tax legislation prior to their introduction to Parliament.

“We remain committed to a well-functioning and efficient revenue collection agency,” said Finance minster Tito Mboweni.

“The South African Revenue Service (SARS) is one of the most critical public sector institutions in the country. I also wish to thank all South Africans who continue to honour their obligations by paying their taxes.”

“Beyond this, we need to restructure and restore the stability of state-owned companies (SOCs). Government guarantees are already being actively restricted and this will continue to be the case in the coming year.

“Active management of government’s debt portfolio will mitigate external and domestic risks.”

Read: South Africa stepping closer to a tax revolt: think tank

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Government spending is too high for South Africa’s tax base – and the problem is not going away: Treasury