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South Africa To Deal With Rising Deficit

by Lorys Charalambous,, Cyprus

29 October 2012

In his Medium-Term Budget Policy Statement (MTBPS), South African Finance Minister Pravin Gordhan's attempted to give reassurance that the government remains committed to reducing the country’s fiscal deficit, despite falling tax revenue growth.

He said that South Africa continues to run a structural deficit that reflects an underlying, longer-term imbalance in revenue and expenditure, but that the aim of medium-term fiscal policy over the next three years will be to narrow this structural deficit towards 3% of gross domestic product (GDP).

Gordhan disclosed that the country’s budget deficit is now expected to widen from 4.2% of GDP in 2011/12 to 4.8% in 2012/13, as, owing to weaker economic conditions, anticipated tax revenue for this year has been revised downwards by ZAR5bn (USD578.3m) to ZAR821.4bn.

The forecast for 2102/13 still implies a “robust” revenue growth rate of 10.6% over the previous year, but that, “if economic conditions deteriorate or mining sector output is disrupted over an extended period, further downward revision may be warranted”.

In line with performance during the first half of 2012/13, the estimated personal and corporate income tax revenue collections for the year have been adjusted downwards, and revenues from import-related taxes, such as value-added tax and customs duties collections, have been revised upwards. Mineral and petroleum royalties have been revised downwards due to lower commodity prices and the mining strikes.

In the future, while gross tax revenue collection is expected to remain subdued in 2013/14, and the deficit is forecast to fall only marginally to 4.5%, it is then budgeted to narrow to 3.1% by 2015/16 as economic growth gathers pace - from about 2.5% this year back to 3% in 2013 and then rising to 4.1% by 2015.

The higher-than-anticipated present budget deficit has therefore been the result of a weak recovery in tax revenue, rather than uncontrolled increases in government spending. As, over the medium-term, government is committed to a limit on real expenditure growth to an average of 2.9% per year, the primary risk to the budget deficit will remain lower-than-projected GDP growth that could result in poor revenue outcomes.

In the MTBPS, Gordhan detailed initiatives both to stabilize government spending, as well as to improve its impact, by, amongst other things, shifting it away from consumption towards capital investment and developing a procurement system that prioritizes value for money.

In that respect, he announced that, within the system that restricts the awarding of government tenders to those who are in good standing with regard to tax compliance, and in a bid to reduce corruption in the tax clearance request process, the South African Revenue Service has developed an electronic mechanism for taxpayers to provide real time, up-to-date and continuous tax status to interested parties.

"The use of a unique one-time access pin will significantly reduce the scope for fraud and abuse of paper-based tax clearance certificates," added Gordhan. The changes will be implemented at the start of the next financial year.

It was also disclosed that the National Treasury will shortly release the preliminary findings of a long-term fiscal report that will assess the sustainability of spending options in light of demographic and economic projections. It will model the impact of a variety of policy changes, including the introduction of national health insurance.

TAGS: South Africa | compliance | tax | economics | value added tax (VAT) | tax compliance | mining | royalties | fiscal policy | gross domestic product (GDP) | corporation tax | ministry of finance | tax authority | import duty | revenue statistics | individual income tax | Africa

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