SA's budget gap in July is biggest in at least 14 years

South Africa’s budget deficit in July was the biggest since at least 2004 as weak economic growth constrains tax collection.

The continent’s most-industrialised economy recorded a budget gap of R95.98 billion ($6.6 billion), the Pretoria-based National Treasury said in a statement on Thursday. That’s the largest since Bloomberg started recording the data. July readings have reflected the biggest shortfall each year since 2010. For the fiscal year to date, the accumulated deficit is R5bn less than in 2017.

The economy contracted in the first quarter and the current-account deficit widened, highlighting the country’s vulnerability to capital outflows. Mining production, once the engine of the economy, has slumped, and manufacturing and consumer spending have struggled to pick up the slack. A widening budget gap limits President Cyril Ramaphosa’s ability to boost infrastructure and social spending.

“There seems to be a persistent underperformance in corporate income-tax collections, and buoyancy levels haven’t improved as much as the National Treasury had hoped because of the weak economic climate,” Jeffrey Schultz, an economist at BNP Paribas South Africa in Johannesburg, said by phone.

The Treasury “will have no choice but to revise up” its budget-deficit forecast in its October 24 mid-term budget policy statement, he said.

The Treasury predicts a shortfall of 3.6% of GDP for the current fiscal year. The government raised the value-added tax rate by one percentage point to 15% -- the first increase since 1993 -- to try to help plug a revenue shortfall of almost R50 billion. VAT is the second-biggest source of government income in South Africa.

Low business and consumer confidence, concerns about corruption and poor governance, increased tax avoidance and administrative problems at the nation’s tax-collection agency contributed to the revenue shortfalls.

VAT Support

“Value-added tax collections are propping up this number - in the absence of the 1 percentage-point increase in VAT this year, the fiscal side of things isn’t looking particularly rosy,” Schultz said.

A panel headed by former judge Robert Nugent is probing the management and administration of the national tax agency under Tom Moyane, whom Ramaphosa suspended as commissioner in March. The National Treasury’s relationship with the South African Revenue Service had been strained in recent years, with SARS not participating in the budgetary process in the way the Treasury was accustomed to, Treasury Director-General Dondo Mogajane told the panel Wednesday.

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