The National Treasury should raise the taxes in South Africa, including Value-Added Tax (VAT), in order to reduce the government Budget deficit, finance infrastructure investments and the growing social security spending.
This is the view of the Organisation for Economic Co-operation and Development (OECD), which has just completed its 2022 Economic Survey of South Africa.
The OECD survey found that South Africa enacted impactful policy measures and concrete recovery strategies in response to the Covid-19 pandemic.
However, it noted that economic challenges and social disparities still remained.
OECD acting chief economist Alvaro Santos Pereira yesterday said boosting job creation and strengthening the redistributive role of the tax and benefit system were key priorities for South Africa.
Pereira said South Africa would need to create more fiscal space to deal with potential future shocks and address spending needs in health, infrastructure, and education.
“In the medium- to long-term, tax revenue mobilisation will be critical. Lifting tax revenues will be necessary to restore the sustainability of public finances and to finance growth-enhancing reforms,” Pereira said.
“The second challenge is to boost productivity. South Africa’s productivity is comparatively low and declining, which is detrimental to living standards. Improving infrastructure, enhanced competition, and better skills are required to boost productivity.”
South Africa’s economy rebounded to pre-pandemic levels during the first quarter of this year, with the economy growing 1.9 percent in the first three months of the year while unemployment eased slightly.
However, OECD’s acting head of country studies, Isabell Koske, said the recovery has been interrupted by the consequences of Russia’s invasion of Ukraine.
The OECD is forecasting South Africa’s economy to grow 1.8 percent in 2022, slightly below the SA Reserve Bank’s forecast of 2 percent.
Koske said South Africa’s tax-to-GDP ratio was higher than in many other emerging economies, while lower than the OECD average.
As a result, she said South Africa should reduce the corporate income tax rate while broadening the tax base, and raise additional revenue by raising the standard VAT rate slightly and compensate low-income households through transfers.
Koske said the government needed to raise taxes in a more effective way through a tax reform which reduces economic distortion, supports growth, and provides sufficient revenue.
“For instance, the progressivity of personal income tax is undermined by deductions and allowances benefiting mostly high-income earners,” Koske said.
“Reducing tax allowances, deductions and tax relief would increase tax collections, restore the progressivity of the tax schedule, and decrease income inequality, which is probably one of the highest in the world.”
Lastly, the OECD said the government should strengthen the social transfer system to cover unemployed individuals by, for instance, making permanent the Social Distress Relief (SRD) grant with a sustainable source of revenue.
These proposals come as the Minister of Finance Enoch Godongwana is preparing to table his Medium-Term Budget Policy Statement (MTBPS) in two months' time.
Godongwana has previously warned that making the R350-a-month SRD grant permanent would be unaffordable and unsustainable in the long run.
Responding to the OECD report, deputy finance minister David Masondo said trade-offs were becoming increasingly necessary in the current economic climate.
Masondo said the Treasury was taking cognisance of recommendations made to enhance growth and productivity while addressing the country’s developmental challenges.
“Our progress in tackling unemployment, poverty and inequality remains insufficient. The roots of our growth challenges are well understood,” Masondo said.
“Low levels of productivity and competitiveness are inhibiting job creation and investment. It’s for this reason that our government is focused on implementing structural reforms to raise growth while embarking on stabilising our debt.”
BUSINESS REPORT