Be prepared for higher income and sin taxes

SOUTH Africa’s Finance Minister Pravin Gordhan is likely to target income, alcohol and tobacco taxes in his February 22 budget to reassure rating agencies that he will gradually rein in the deficit in coming years, a poll found.

The poll, taken in the past week, shows economists expect the government to target a budget deficit of 3.2 percent of gross domestic product in the fiscal year from April 1.

That is narrower than the 3.4 percent estimated for the fiscal year about to end.

The Treasury is then expected to narrow the budget deficit further to 2.8 percent of gross domestic product (GDP) in the 2018/19 fiscal year and 2.5 percent the following year.

Most of the 15 economists surveyed expect the Treasury to boost revenue with personal income tax hikes as well as levies on purchases of often harmful goods such as alcohol and tobacco products to plug a R28 billion shortfall in the new financial year.

Challenge

“The fiscal situation is a huge challenge for the South African government, given increasingly difficult debt dynamics,” wrote IHS Markit economist Thea Fourie in a note.

“On the one hand, there is an urgent need to lower the budget deficit in order to avoid a sovereign risk downgrade to sub-investment status; on the other hand fiscal adjustments that will impact GDP growth adversely should be avoided.”

A fuel levy increase as well as higher Value Added Tax (VAT) were listed as other possible options for Gordhan to generate new revenue.

A fuel levy increase as well as higher VAT were listed as other possible options.

IHS Markit’s Fourie noted that an indirect tax like VAT, rather than income tax, had the potential to provide more substantial fiscal revenue growth, but may be too politically sensitive an option at the moment.

South Africa has not escaped the risk of being downgraded to junk status after it got a reprieve in December.

Standard & Poor’s (S&P) and Fitch’s ratings are both just one level above junk status, while Moody’s is two notches above.

Moody’s, which put South Africa on negative watch in its review, is due to revisit that on April 7, followed by S&P at the beginning of June.

Poor economic growth in South Africa has stymied the government’s ability to generate revenue, and there is no major turnaround imminent.

The latest poll predicted just 1 percent growth this year, followed by 1.6 percent in the following year.

A wave of global trade protectionism that is sweeping rich nations could also sap some demand for South Africa’s exports.

However, that may be offset by stronger commodity prices. – Reuters