OECD Urges South Africa to Raise Taxes, Sell State Firms

South Africa should change its tax regime to fund economic-growth enhancing reforms and reduce inequality now that it has reached the limits of budget adjustments that were aimed at reducing fiscal deficits and reining in debt according to the Organisation for Economic Co-operation and Development.

Africa's most-industrialized economy is battling surging debt, which the government expects to peak at 75.1% of GDP in the next fiscal year, and its interest bill has been the fastest-growing line item in the budget since 2011. Both are important risks to fiscal health and have been compounded by the damage done by the coronaviruses epidemic.

While putting public finances on a more sustainable path is key to restoring to confidence, the government should spend money more efficiently and benefit from a less-distortive tax system. There is a wide range of tax provisions and exemptions that reduce tax rates considerably below statutory tax rates.

According to the Organisation for Economic Co-operation and Development, the top 10% of South Africa's earners contribute almost half of all revenue, and the richest 10% of the population hold 85.6% of net wealth.

Tax the Rich

South Africa has been ranked as the world's most equal nation for more than 25 years after the end ofapartheid. While presidents from Nelson Mandela have expanded the welfare system and undertaken affirmative action policies to create a substantial Black middle class and lift millions out of poverty, inequality continues to be an issue.

The country's progressive personal income tax schedule is undermined by deductions. It said that raising levies on fringe benefits, cutting allowances for travel expenses, and exercising share options could solve the problem. South Africa should cut exemptions for life insurance, trust and pension savings in order to broaden its estate tax base.

The personal income tax needs to strike a balance between reducing inequalities and preserving work incentives for middle to high-income people, according to the Organization for Economic Co-operation and Development.

The value-added tax rate in South Africa is 15% and lifting it by 2 percentage points would raise its contribution to revenue by 1%. Increasing the tax, which the government has done only twice since 1991, is unpopular within the ruling African National Congress because it affects the country's poor the most.

To increase the political acceptability of a further VAT rate reform, it is preferable that any increase in the standard VAT rate be accompanied with increased transfers to low-income households. The social relief grant will allow for a further tailoring of the support to poor people when increasing the VAT rate if it is permanent.

The so-called social relief of distress, or SDR, grant was first introduced in response to the Pandemic. In a country where there are more social support beneficiaries than taxpayers, it added more than 10 million people to the welfare net.

The corporate income tax rate in South Africa was lowered. There is scope to reduce it further if the tax base is expanded. It said that digital taxes could be improved.

South Africans are grappling with a cost-of-living crisis and aggressive interest rate hiking. The National Treasury said in October 2020 that recent tax increases generated less revenue than expected.

With the state's wage bill accounting for about a third of government spending, future pay increases should be more fiscally sustainable. Improving transport infrastructure, electricity generation capacity, telecommunication networks, reducing barriers to competition, and broadening access to higher education are some of the ways in which productivity growth can be improved.

The government's high exposure to state-owned companies, some of which continue to under-perform despite changes in management, "represents a risk to debtsustainability and public finances" The privatization of some companies and the implementation of a governance framework that shields firms from political interference were recommended.

South Africa is trying to tackle corruption in the public sector but its efforts are too slow according to the Organisation for Economic Co-operation and Development. The rule of law, as well as the social fabric and sustainable economic development, are threatened by corruption.