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Given the prospect of continued low economic growth, and the consequent risk that the Government's fiscal consolidation targets will not be met, the International Monetary Fund (IMF) has suggested that the South African value-added tax (VAT) rate may have to be raised.
Following this month's visit of an IMF mission to South Africa to discuss the outlook for the South African economy, a statement said that "the fiscal measures envisaged under the Medium Term Budget Policy Statement (MTBPS) strike a balance between maintaining debt sustainability and safeguarding the fragile economic recovery."
However, it added that, "in the event that economic growth projections for the medium term were further revised downward, additional measures – such as lower increases in public sector wage rates and a moderate increase in consumption taxes – would be needed to stabilize the debt ratio."
Previous comments from the IMF after this year's Article IV consultation with South Africa also pointed out that, if there was the need for further fiscal consolidation, raising the country's VAT rate toward the emerging market average could be needed. While the MTBPS, released in October, proposed to raise an additional ZAR43bn (USD3.15bn) through tax measures over the next two fiscal years, specific policies were not mentioned.
Last year's report from the Davis Tax Committee discussed the potential impact on the South African economy of raising the VAT rate. It confirmed that an increase to the current South African 14 percent VAT rate would be somewhat inflationary in the short-run, but would have a lesser effect on economic growth than income tax rate rises.
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