By Kopano Gumbi, CNBC Africa markets reporter
Minister of Finance Tito Mboweni has decided to cut the strained South African consumer some slack this year by keeping taxes largely unchanged.
Government will not raise additional revenue from tax proposals this financial year. The R63 billion revenue shortfall, the widest shortfall in a decade, is expected to be covered through the management and consistent decrease of the public-sector wage bill.
“In this difficult economic time, it would be foolhardy to introduce a hike in VAT rates,” said Mboweni.
This first budget tabled in the 6th administration has come at a difficult time. With economic activity grinding to a halt, the minister is stuck between al rock and a hard place. Real GDP growth is estimated to be a measly 0.3 percent for 2019 and the projections for 2020 and beyond remain bleak, barely crossing 1 percent. Tax collection revenue was again below expectations, and industry estimated that power cuts caused losses of about 0.1 per cent of GDP in the fourth quarter of 2019.
Ratings agency Moody’s, the last agency to keep South Africa above investment grade, recently announced it was revising down South Africa’s 2020 growth forecast to 0.7 percent. National treasury estimates that 2020 real GDP growth will be 0.9 percent.
The risk to South Africa keeping its investment-grade credit ratings has become more pronounced. The government has noted a sharp increase in borrowing requirements as the fiscal position worsens, and all things being equal, the debt requirement will reach nearly R500 billion in two years’ time.
It is within this context that the government will not raise additional revenue from personal income taxes for this year. Choosing instead to reduce the public-sector wage bill by R160 billion and committing to spending the already limited resources more prudently. A move that may delight concerned citizens but aggravate unions that have already expressed displeasure with the proposal to reduce public sector wages.
“Eventually government and public service workers will find each other somewhere along the way, but for the credibility of our fiscal stance that R160 billion has to be found for all our sakes,” said Mboweni.
The Minister further explained that macroeconomic policy would indicate that a rate cut would have been warranted to spur economic growth. The corporate tax rate remains unchanged at 28 percent and excise duties will be going up in line with inflation and Mboweni hinted that a corporate rate cut could be on the cards if the government can get its ducks in a row.