Why we can’t really raise taxes in South Africa any more: deputy finance minister

It is no secret that South Africa has serious economic challenges, and chief among these is that the government is struggling to stabilise public debt, says deputy finance minister David Masondo.

Speaking at an event on Thursday (6 May), Masondo said that this problem emerged before the Covid-19 pandemic, and has grown from the structural gap between tax revenues and the government’s spending commitments.

“One of the strategies government tried to close the gap between spending and revenue, was to try to increase taxes, which even included raising VAT.

“But, as we have argued in the budget review, this has not really worked because economic growth has continued to fall, which has meant that tax revenues kept coming in lower than we expected,” he said.

Masondo said that Treasury is now worried that raising taxes could even contribute to the country’s growth slowdown – which is why this year’s budget offered some tax relief.

“Because we were not able to increase tax revenue, even the modest increases in spending which we had been budgeting for led to larger and larger deficits and more and more borrowing,” he said,

Growing debt 

Masondo said that debt service costs are now the fastest-growing line item in the budget, and that this has been the case for some time.

“When that is already happening, and when you still need to borrow more and more, you lose credibility in capital markets, and you have to pay higher interest rates when you borrow.

“That’s what the downgrades of our credit rating reflected: buyers of South African debt were worrying that we may be over-extending ourselves. And, the truth is, we were over-extending ourselves.”

This is the reason cabinet decided in 2019 that much more needed to be done to consolidate spending, and to make sure that spending was more aligned with the performance of the economy and with what the country could afford, Masondo said.

It was also for this reason that the budgets of 2019 and 2020 introduced measures to slow the rate of growth of spending, he said.

“I want to emphasise that this was all done before Covid-19. It was where we were in 2019 and even in 2018.

“But, of course, Covid-19 has really battered our public finances: the recession means that tax income for government is much lower than it would have been, and, of course, we have had to spend a lot of money on supporting the economy and households.”

While high commodity prices have helped us bring in more revenue than National Treasury projected in the Supplementary Budget last June, Masondo said that this is still far below Treasury’s projections presented in February 2020.

The result is that our budget deficits over the next few years are going to be largest this country has ever had, he said.

“I make all of these points because it is important to understand that the difficult decisions government took in the budget last year and this year were not because of ideology or because we like to make life difficult for ourselves.

“We took those decisions because we have to get the financial house of government in order. If we don’t do that, we will have even deeper crises down the line and a deeper crisis is in nobody’s interest.”

Read: South Africa faces three big credit rating reviews in May – here’s what to expect

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Why we can’t really raise taxes in South Africa any more: deputy finance minister