R50.8bn tax shortfall forecast
Deficit grows to 4.3% of GDP
SOUTH Africa’s consolidated budget deficit will widen to 4.3 percent of gross domestic product (GDP) in 2017/18, as tax revenue is projected to fall short of the 2017 Budget estimate by R50.8 billion during the period.
The National yesterday described the shortfall as the largest under-collection since the 2009 recession.
The Treasury said the widening deficit could jeopardise social and economic spending, because debt-servicing costs are set to spiral. It said that by 2020/21 nearly 15 percent of main budget revenue would be spent servicing debt.
When the budget is in deficit, the government borrows to fund the shortfall, hence the risk of soaring debt-service costs.
“As gross debt expands, debt service will remain the fastest-growing category of spending over the next three years,” the Treasury said.
The deficit is in contrast to the previous target of 3.1 percent. Some polls had predicted that poor tax collection could push the 2017/18 budget deficit to 3.9 percent.
The Treasury said it estimated Treasury that gross tax revenue for the period 2017/18 to 2019/20 would fall short of the 2017 estimates by R209bn.
It said the government’s short-term options to narrow the deficit had become limited.
“Given that per capita income is falling, the economic impact of further expenditure cuts or tax hikes could be counter-productive,” it said.
“Following several years of expenditure restraint, further budget cuts will involve hard choices and difficult compromises. Sudden or deep additional cuts that are not well targeted could put severe pressure on already stressed departmental budgets.”
The Treasury said some departments were battling to operate within the compensation limits set by Parliament in the current year, with several provincial departments running up unpaid bills “to maintain service-delivery levels”.
Finance Minister Malusi Gigaba said the government had been considering the “best” fiscal strategy to ensure that the programme of measured fiscal consolidation was not derailed.
“None of the options are free of pain. Some would argue for the imposition of more austere measures to aggressively rein in the growth of public debt. Others might argue that to reduce spending levels would further damage the economy,” said Gigaba.
The Treasury said stabilising gross debt below 60 percent of GDP over the coming decade would require spending cuts or tax hikes amounting to 0.8 percent of GDP, adding that this would amount to R40bn in the 2018/19 financial year.
It said revenue growth had been weak, with gross revenue growing by 5.9 percent in the first six months of this year, against a target of 10.7 percent.
“All tax instruments are performing poorly, with large shortfalls for personal and corporate income tax, and dividend withholding Treasury said.
The department attributed the weak growth to, among other things, slowing growth in key sectors such as finance, retail and telecommunications, low personal income tax collection due to low bonus payments, moderate wage settlements, job losses and a slower expansion of public sector employment, low corporate income tax collections in the first half of 2017/18 because of persistently weak growth and commodity price volatility, as well as weak investment and household consumption, which led to a sharp contraction in imports in 2016, affecting VAT and customs duties.
It said it was considering tax,” the additional tax in order to boost revenue in future. It said, in light of the overall pressure in the economy and the fiscus and the need to stabilise the debt-to-GDP ratio, additional tax proposals need to be “carefully considered”. This is consistent with its assertions earlier this year that deferring tax increases by accumulating more debt would burden South Africans in future.
Gigaba said the government was considering “fiscal efforts”, which were a mix of expenditure cuts and revenue increases, to address some of the revenue shortfall over the medium-term expenditure framework. He said announcements on these would be made before the 2018 Budget.