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Unexploited potential?

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Unexploited potential?

Photo by Duane Daws

6th November 2015

By: Terence Creamer
Creamer Media Editor

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On the same day that Higher Education and Training Minister Blade Nzimande was mooting wealth or graduate taxes as possible remedies for dealing with a gaping hole in tertiary education funding, the International Monetary Fund (IMF) released a report listing South Africa among a group of sub-Saharan African countries with a “size- able” unexploited tax potential. The other countries listed as having such potential were Angola, Ghana, Kenya, Nigeria and Tanzania.

Released in Johannesburg, the October ‘Regional Economic Outlook for sub-Saharan Africa: Dealing with the Gathering Clouds’ argued that the deterioration in the economic climate meant that preserving fiscal soundness in the short term and boosting fiscal buffers over the next few years had taken on renewed importance.

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The IMF expected growth in the region to decelerate from 5% in 2013 and 2014 to 3% in 2015, before recovering to 4% in 2016 on the back of the gradual pick-up in global activity.

Speaking at the launch, the IMF’s Antoinette Monsio Sayeh, who was previously Liberia’s Finance Minister, noted that the drivers of growth since the mid-1990s – improved policies, increased aid, debt relief, abundant global liquidity, and high global commodity prices – had started to dissipate.

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Sayeh argued that, with borrowing costs rising and financial conditions tightening, strengthened domestic revenue mobilisation would be “the most durable way to create fiscal space, finance much-needed infrastructure and other development needs, and reduce reliance on public debt”.

She stressed, too, that such mobilisation would need to be coupled with efforts to further diversify African economies, as well as strengthen public financial management and optimise public spending.

The headroom for South Africa to raise taxes was based on a global ‘tax frontier’ analysis, with the frontier representing the upper level of tax revenue ratios that could be raised for a given level of economic and institutional development. The distance to that tax frontier for any given country reflects both tax-policy preferences and tax-administration capabilities.

The analysis suggested that the median country in sub-Saharan Africa might have the potential for another 3 to 6.5 percentage points increase in tax revenue, with South Africa, which had a tax:gross domestic product (GDP) ratio of 25%, at the upper end of the range.

The IMF analysis came only days after South Africa’s Finance Minister Nhlanhla Nene held off from announcing any firm plans to raise taxes in his Medium-Term Budget Policy Statement address, promising instead “strict adherence” to government’s expenditure ceiling.

Nene said proposals for additional taxes would be “approached with caution”. In February, he announced hikes in personal income tax rates and indicated that the Davis Tax Committee, led by Judge Dennis Davis, was still considering other possible changes, which were “essential to fund government’s ambitious policy agenda”.

The Minister stressed that all tax changes would be consulted, but that government would “act decisively” should conditions change on either the growth or revenue front.

In seeking to tap this potential, the IMF urged governments to pursue designs that minimised distortions and inefficiencies and took account of tax-administration constraints.

“Beyond a stable macroeconomic environment, this will critically define the region’s ability not only to weather the strong current headwinds but also to preserve the path of strong growth in the medium term,” the report stated.

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