South Africa’s Widening 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 Jan. 15-21. The largest shortfall on record was 11.6% of GDP in 1914, followed by 10.4% in 1940.

SURVEY REPORT: South Africa Economic Forecasts in Jan. 2021

South Africa’s Widening Budget Gap May Drive Up Tax Targets

“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 Holdings SOC Ltd., the South African Broadcasting Corp., Denel SOC Ltd. 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 40 billion rand ($2.7 billion) in revenue, comprising 5 billion rand in 2021-22, 10 billion rand in 2022-23 and in 2023-24 and 15 billion rand in 2024-25. That may have to be increased with spending needs becoming more pressing and the Business Day newspaper reporting this weeks that the government is 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 160 billion rand 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%.

©2021 Bloomberg L.P.

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