SA’s catastrophic shortfall in tax revenue could pave road to IMF
A gap would have catastrophic consequences for the government’s budget deficit
The government faces a potential revenue shortfall of up to R285bn this year, posing a catastrophic scenario which could raise the likelihood of further approaches to multilateral agencies such as the IMF for financial support.
On Tuesday, Sars commissioner Edward Kieswetter said that though it was still “early days”, the tax agency’s initial estimates suggest tax collections will be down by 15%-20% from those forecast in this year's budget, based on April’s revenue collection performance.
The estimated shortfall is due to a sluggish economy, which was already in recession before the coronavirus pandemic hit SA, as well as the effects of the lockdown ordered by the government to slow the spread of the virus.
The R285bn gap would have dramatic consequences for the government’s budget deficit, its debt sustainability and debt service costs should it materialise, said Stanlib chief economist Kevin Lings.
It would require “dramatic action” from the state, including deep cuts to expenditure and possibly a more comprehensive fiscal support package from agencies such as the IMF that would include greater conditionality, he said.
The Sars figures follow estimates supplied by the Treasury last week, based on research from the UN University World Institute for Development Economics Research (UNU-Wider), suggesting SA’s economy could contract as much as 16% this year depending on the length and severity of the pandemic and the lockdown’s effects.
The worst-case scenario predicts as many as 7-million jobs could be shed, according to the presentation.
The projected revenue shortfall could potentially push the government deficit towards 16% of GDP, Lings estimated, against the 6.8% forecast in this year’s budget.
“That is catastrophic,” he told the Business Day.
The government’s debt trajectory would surpass the “break point” level of 80% of GDP in the next three years, while debt servicing will likely reach 20% of government expenditure, Lings said.
Ratings agencies Moody’s and S&P Global downgraded SA in recent weeks, cementing SA’s debt as subinvestment grade at a time when global markets are volatile and investors treat riskier assets with caution.
Under current conditions, and even though the government would have to pay more to investors willing to lend to it, Lings questioned whether there would sufficient market appetite to fund the gap.
“You would be going to a market that is already under strain without investment grade credit ratings,” he said.
But the government needed to clarify whether the R285bn gap was its base-case scenario, said Lings.
The state has already approached multilateral agencies including the IMF, World Bank and New Development Bank to finance part of the R500bn additional stimulus package to support the economy through the pandemic.
These funds, however, are aimed at the country's Covid-19 response and do not come with the same level of conditionalities associated with an IMF structural adjustment programme.
Lings argued that the National Treasury will need to draw up a new budget that goes further than the adjustments budget it has committed to tabling before parliament in the coming months.
Though the effects of the lockdown are only beginning to be understood, initial data this week showed plummeting car sales and a near halt to manufacturing activity.
Calls have mounted for the government to do more to reopen the economy. Though Kieswetter did not want to comment on the “politics or the rationale behind the lockdown” he stressed the risk of losing “economic capacity”.
“A major concern that we have from a revenue perspective is not only a downward trend of economic activities, but a loss of economic capacity due to businesses closing and job losses,” he said. “Many businesses will simply not be able to operate profitably at reduced capacity and will fail completely.”