Think tank warns of ‘tax shock’ for South Africa

 ·7 Jun 2022

The Centre for Development and Enterprise (CDE) has warned that not enough research has been done into the effect of a Basic Income Grant (BIG) and how it will impact the country’s tax base.

Presenting its findings on a proposed basic income tax on Tuesday (7 June), the think tank said the proponents of a BIG have made no serious attempt to assess the extent to which the imposition of a tax shock of the scale they envisage would slow economic growth, and by how much.

“This is, however, a near certainty. The implication is that even if the introduction of a BIG was accompanied by new taxes to pay for it, the negative effect on economic growth would mean that it would become even more difficult to stabilise the debt ratio,” the group said.

While the range of possible combinations of eligibility and value is very wide, in practice, most proposals from civil society organisations and the government appear to favour a grant that would cost in the hundreds of billions of rands a year.

The think tank noted South Africa has run a large structural deficit for nearly 15 years. The result is that the ratio of debt to GDP has risen rapidly. These trends imply that current spending is unaffordable – so adding a large, permanent spending commitment to the mix will only reinforce the unsustainable character of fiscal policy, it said.

“When the debt ratio rises as quickly as it has in South Africa over the past 15 years, it is a clear indication that the level of public spending exceeds the amount of taxes that government is willing or able to impose on society and/or that it is premised on over-optimistic predictions of economic growth,” the CDE said.

“And, given the somewhat doubtful credibility of existing efforts to restrain spending growth – which rely very heavily on an implausibly long period of zero wage growth in the public sector – it would seem clear that a new spending commitment as large as the BIG would be unaffordable.”

Read: Why South Africa’s new pension rules are good for investors: economist

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