SA’s budget gap may drive up tax targets

South Africa may be forced to revise its tax increase targets as its budget shortfall is set to breach wartime levels for a second consecutive year.

The budget deficit will reach 11% of gross domestic product in the fiscal year through March 2022, according to the median estimate of 13 economists in a Bloomberg survey.

That compares with the government’s estimate of 10.1% published in October’s medium-term budget policy statement.

Increased spending and restrictions aimed at limiting the spread of the coronavirus pandemic that weighed on output and tax revenue are expected to push the gap to 15.9% of GDP in the current financial year, according to the survey that was done from January 15 to 21. The largest shortfall on record was 11.6% of GDP in 1914, followed by 10.4% in 1940.

“Over the next three years South Africa will see very large budget deficits,” said Mike Schussler, chief economist at Economists.co.za. “The shouts for funding will become screams as state-owned enterprises like Eskom, the South African Broadcasting Corporation, Denel and others will need money from the fiscus.”

With no extra money available for government departments for the next three years, the Treasury said last year that it plans to raise an additional R40 billion in revenue, comprising R5 billion in 2021-22, R10 billion in 2022-23 and in 2023-24 and R15 billion in 2024-25.

That may have to be increased with spending needs becoming more pressing and government considering raising taxes income to fund the rollout of coronavirus vaccines.

The Treasury discussed the possibility of a wealth tax last year.

Such a levy on the net worth of South Africa’s richest people could raise as much as R160 billion annually, according to a study since carried out by groups including the World Inequality Lab.

South Africa’s top income-tax rate is 45%, and its ratio of tax revenue to GDP is at 26%, compared to a global average of 15%.

Over the next three years South Africa will see very large budget deficits.

Mike Schussler Chief economist at Economists.co.za