South Africa’s growing tax problem

 ·1 Mar 2022

South Africa’s record-high unemployment rate not only has implications for the country’s labour market and productivity but is also a concern for future tax collections.

This was flagged by the Financial and Fiscal Commission (FFC) in a presentation to parliament on Tuesday (1 March), with the group warning that the narrowing tax base due to rising unemployment may put pressure on public spending, increase the budget deficit, and increase borrowing requirements.

The FFC is an independent constitutional advisory institution. Its role is to advise and make recommendations to Parliament, provincial legislatures, organised local government, and other state organs on financial and fiscal matters.

“Structural challenges in the labour market and weak economic growth have undermined progress in reducing poverty, unemployment and inequality, which the Covid-19 pandemic has heightened. The rising unemployment constrains the achievement of economic inclusion,” it said.

The official unemployment rate increased from 34.4% in the second quarter of 2021 to 34.9% in the third quarter of 2021 – the highest recorded unemployment rate in South Africa in its economic history since democracy.

According to the expanded definition of unemployment, the unemployment rate increased by 2.2 percentage points to 46.6% in Q3 2021 compared to the previous quarter. The country’s Q4 unemployment results have been delayed.

The FFC noted that the country’s employment recovery continues to be sluggish and has not recovered to pre-Covid levels.

“Labour market interventions and public employment programmes have successfully created short-term and permanent jobs (in some instances), but this has not translated into changing the macro-level picture of unemployment. More fundamental structural reforms are required to address unemployment in the long run,” it said.

A future problem 

The South African Revenue Service (SARS) has previously flagged the country’s high youth unemployment rate as a potential future problem for the country’s tax collections.

The concerns were highlighted in the revenue collector’s annual performance plan published in May 2021.

“South Africa is a country of young people, as recent statistics released by Stats SA indicate. The same is true for our current individual tax base,” it said.

The high, and growing, unemployment amongst the youth is a serious threat to the tax base and the overall integrity of the tax system.

“It has become a serious constraint to revenue growth and will cause further strain on the government to increase spending on social benefits.”

Read: SARS boss warns non-compliance will not be tolerated

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