Reform the tax regime and keep relief grant, OECD tells SA

The Paris-based Organisation for Economic Co-operation and Development (OECD) has recommended that SA’s social relief of distress grant be made permanent, that the VAT rate be increased from 15% to 17% and that the “distortive” personal income tax system, which benefits the wealthy, be reformed.

Such measures would help improve the sustainability of the fiscus, which faces gross loan debt to GDP of 75.1% in the 2024/2025 fiscal year and a crippling interest bill.

They would also provide support to the poor.

In its 2022 economic survey of SA released on Thursday, the OECD projects growth of 1.8% this year and 1.3% next year, saying the risks to the outlook remain high. The Reserve Bank has forecast growth of 2% in 2022 and 1.3% in 2023.

The OECD forecasts an inflation rate of 6.3% this year — slightly below the Bank’s forecast of 6.5% headline inflation.

Making permanent the R350 social relief of distress grant, which benefits about 10.5-million unemployed people, would cost the fiscus about R42bn a year, the OECD estimates. Its proposal comes amid intense debate over the introduction of a basic income grant, which some have argued is unaffordable.

The OECD suggests that a permanent social relief of distress grant could be financed by savings on spending, strengthened public procurement procedures, increasing the VAT rate or broadening the basis of corporate and personal income taxes. Environmental taxes could also help raise revenue.

Lifting the VAT rate by two percentage points could raise VAT revenue by about 1% of GDP, according to the OECD, which stressed that a hike in the rate should go hand in hand with increased transfers to low-income households “to mitigate any potentially adverse distributional effects and to increase the political acceptability of a further VAT rate reform”.

Proposals were also made to broaden the corporate and personal income tax base and broaden the estate tax base by reducing exemptions for life insurance, pension savings and trust vehicles, as well as closing other tax avoidance schemes.

The OECD said a less distortive tax system would help improve public finances.

“Fiscal sustainability might be at stake,” it said.

“To reduce the government deficit and finance the needed investments ... and accelerating expenditures, it is key to increase revenues.”

It noted that “considerable fiscal space will be needed in the years ahead to finance health, infrastructure and higher education gaps, which are key to raising growth and wellbeing. More efficient spending and revenue collection are necessary.

“Overall, tax rates are already high or comparable to OECD levels, but there is a wide range of tax provisions and exemptions that reduce effective tax rates significantly below statutory tax rates.

“The progressivity of the personal income tax is undermined by sizeable tax deductions and allowances benefiting mostly high-income earners.

“Reducing tax allowances (travel expenses, share options exercised and others), deductions and the tax relief for pensioners would increase tax collections. In particular, deductions for medical expenses should be reduced. Moreover, fringe benefits should be brought more substantially into the taxable income base.”

Corporate tax

The OECD said there is room to reduce the corporate income tax rate and broadening the corporate income tax base.

It said action to improve productivity growth would help revive GDP growth and raise living standards.

Higher productivity could be fostered through enhanced infrastructure, education and competition, and a more reliable power supply. Electricity shortages remained the most pressing bottleneck to economic activity, with productivity growth also being held back by an insufficient provision of high-quality infrastructure, such as roads, railways and telecommunications.

“Improving the effectiveness of public investment, in part through strengthening the selection process for large infrastructure projects, would be a step towards restoring productivity growth,” the survey said.

“Improving skills in line with employer needs will also be key to revive GDP growth” and “accelerating the green transition by increasing the share of renewable energy would also support growth”.

Better management of state-owned enterprises and combating corruption would also be crucial.

Deputy finance minister David Masondo said in an introductory speech at a media briefing to release the OECD report that many of its recommendations were broadly consistent with government thinking.

ensorl@businesslive.co.za