Cape Town - South Africa’s budget is facing a "hole" of about R50bn despite tax hikes, according to emerging markets economist Peter Attard Montalto of Nomura.
In an update to investors on Friday afternoon, Montalto said that despite the February Budget’s inclusion of R28bn of tax hikes, it was “failing to keep revenue above water”.
“Overall, we think there is a budget hole of around R50bn for this fiscal year, which is higher than our previous estimate of R30bn,” said Montalto.
A R50bn budget hole corresponds to about 1.1% of South Africa’s gross domestic product.
“The National Treasury would argue that growth will recover through the fiscal year and it will with the Q2 (second quarter) stronger than expected, but we do not see that being maintained with a fall back in H2 (the second half of the year).”
Montalto said revenue underperformance had been widespread.
“A decent start to the year in Value Added Tax (VAT) has been helped by delayed VAT refunds being processed.
Personal income taxes have been significantly underperforming the last three years (on) average, even as higher unemployment and stalled wage growth offset the bracket creep and new top rates of income tax,” he said.
Montalto said that the budget hole would likely be sustained into 2018.
This would place particular stress on the Treasury, if government were to also introduce free higher education for all university students, he said.
According to the South African Institute of Race Relations, free higher education for all tertiary students in South Africa would cost in the region of R71bn per year.
The budget shortfall and the possibility of of government having to pay for free higher education would require “deeper cuts elsewhere to remain within the expenditure ceiling” in the 2018 budget, said Montalto.
He noted that R15bn of unspecified tax hikes had been pencilled into next year’s budget, but said more was “clearly needed”.
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