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VAT hike, extra levy on income maybe, but SA unlikely to avoid Moody's downgrade

VAT hike, extra levy on income maybe, but SA unlikely to avoid Moody's downgrade

JOHANNESBURG – An extra tax on income for individuals and companies and another VAT hike are on the cards when South Africa’s "do or die" 2020/21 Budget is delivered next Wednesday.

While VAT was increased to 15 percent in February 2018 and was then left untouched last year, Old Mutual Investment Group’s chief economist Johann Els said another VAT rate increase could not be ruled out in the face of mounting pressure to address widening deficits and climbing debt-to-GDP ratio.

The Budget deficit climbed to 6 percent of gross domestic product (GDP) last year, with extra spending on Eskom adding strain to the public purse, which is already stretched. 

“Treasury has not been able to rein in the budget deficits over the last few years, so it is really now or never. We are on the verge of a Moody’s rating downgrade, and if we don’t stabilise the deficit and get spending under control, they will downgrade us,” said Els.

South Africa is reeling from five consecutive years of less than 1 percent average GDP growth, which has harmed the deficit and the debt burden.

“We pay more than R200 billion a year on interest payments alone – which is more than the annual budgets of health, education and police services,” said Els, who says South Africa needed annual economic growth of 2.5 to 3 percent to stabilise the debt ratio and prevent a debt trap.

Debt to GDP has shot up from 26 percent in 2009 to 60 percent, and this is making it difficult to service debt, with interest on debt already 11 percent of total expenditure.

While there will be an attempt to reduce additional spending, cutting back on the wage bill would be advantageous; however, this is not likely.

“This will be difficult to pull off politically and would need to be negotiated with unions, but potentially it could be a big game-changer: just limiting wage bill growth to 4 percent could save R100 billion. While the intention in the Budget must be on the spending side, I am doubtful that the Finance Minister will be able to do enough,” said Els.

As a result, Els expects a Moody’s credit rating downgrade in March 2020.

“There will be some attempt to correct the Budget but it won’t be enough to satisfy Moody’s, so my base case is a rating downgrade by Moody’s at the end of March.” Consumers and investors need not panic, however, as the downgrade has largely been priced in the market.

However, consumers need to brace for potential additional taxes on top of the usual suspects like no relief for fiscal drag, and extra sin and fuel levy taxes.

“A transition levy, like we had in the mid-90s – which is an extra levy on income tax for individuals and companies – could also be on the cards,” says Els.

“Expect the government to look for any possible means to increase revenue, but it is a very tough balancing act, and this Budget is definitely going to be one of the toughest yet in Democratic South Africa. However, we’re out of time – some critical decisions will need to be made,” concludes Els.

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