As the country struggles with SOEs on the brink of collapse, below-target revenue collection and reluctance to cut the public sector payroll, Absa predicts that government is likely to announce a VAT increase to 16% during the Budget speech next month.
“We think the government will once again rely primarily on taxes to try to narrow the deficit, and in particular, we are making the bold call of a 1 [percentage point] rise in the VAT rate,” said the financial services group in its economic forecast, ahead of the 2020 Budget to be presented on 26 February.
The bank expects the finance minister to increase VAT to 16% and to not adjust taxes for inflation like Treasury did last year, which saw people paying more taxes even when their salary increases did not match inflation. The bank said this, with a series of other small tax adjustments, could deliver an additional R35bn in tax revenue.
Government needs extra funding to bail out SOEs such as Eskom. In line with this, the minister announced last year in October's mini-budget a cut of R20.3bn in transfers to provinces, with government transfers cut by R20.5bn.
Following SAA’s request for R2bn to continue running, more money will be needed to bail out other struggling SOEs. Absa foresees an additional R20bn cut on spending to be announced for the coming financial year.
Given an already constrained fiscal policy and South Africa seeing increasing interest rates on its debt higher than the country’s economic growth, there is an urgent need for SA to run primary surpluses in order to stabilise debt to GDP.
According to Absa, it seems that government’s hands are tied, and a possible tax hike is the only viable solution to relieve the collection of revenue since the possibility of cutting spending on public sector compensation – which accounts for 34% – is unlikely.
“We believe the scope for big cuts is limited, given that the government is in the middle of a multi-year pay deal with civil servants, which ends only in March 2021, and it has also promised not to implement any mandatory retrenchments,” Absa said.
Other sources that have significant weight on government expenditure such as social grant, accounting for 9% in total spending, and the interest bill, accounting for 11%, cannot be cut.
In 2018, South Africa saw a VAT hike to 15% from the 14% which had been in place since 1993 – a first for the country since democracy.