Finance Minister Nhlanhla Nene has warned that South Africa’s last investment-grade rating may be at risk due to lower tax revenue collection resulting from the recession.
Speaking at the Tax Indaba in Sandton on Monday, Nene said that the ability of a government to borrow at reasonable interest rates is dependent on tax collections.
“Lower tax collections have serious consequences and can impact everyone, whether it be through lower expenditures on education or health, or through increases in tax rates to make up for shortfall.
“The 2018 budget gave South Africa a credible path forward to keep an investment grade with one of the three credit rating agencies.
“However, there is now a downside risk to tax revenue because of the contraction in the first six months,” the minister said.
Last week, South African markets were hit with shocking data that the country’s economy had contracted by 0.7% in the three months ended in June, following equally shocking results in the first quarter which were revised to a 2.6% contraction from the 2.2% contraction that was previously disclosed.
Economists warned that the two consecutive poor performances would attract the attention of credit rating agencies once again and could lead to South Africa losing its investment-grade rating from Moody’s.
Nene said that tax collection had been disappointing in the last few years, going against a slow economy and the inefficiency of tax administration. He said that growing the economy is “now critical” to expand tax revenue, especially since shortfalls in tax revenue of R30 billion and R49 billion had occurred during the past two fiscal years.
In making up for the shortfalls, National Treasury had increased personal income tax in recent years and, this year, increased value-added tax (VAT). Nene said that tax avoidance and tax evasion would be on the rise in any economy which was growing more slowly and where taxes had been increased.
He said to that to combat this, state-owned entities would need to be stabilised and for government to create policy certainty in the mining sector, which would be key to “raising the quality of economic growth”.
“A strong, capable and effective revenue authority must be there to limit [tax evasion] and make sure the correct amount of revenue continues to be collected,” he added.
This has shifted attention back on to Sars, which is currently undergoing a national inquiry that’s looking into the unravelling at the revenue service and its mismanagement by suspended commissioner Tom Moyane.
“We aim to be a society based on democratic values, social justice and human rights. For me, this is about the democratic values of transparency and accountability,” Nene said in attempting to instil some reassurance that the ministry will overcome the economy’s shortfalls.