OECD urges South Africa to remove hindrances to economy
The Organisation for Economic Co-operation and Development (OECD) has urged SA to increase taxes on the wealthy, tighten up on corporate and personal tax allowances and broaden the valued-added tax (VAT) base in order to raise the resources it will need to fund development, reports Business Day Live.
The OECD’s 2015 economic report released on Friday acknowledges strides made by SA in reducing absolute poverty through social grants and the provision of social services to the poor. However, it states that economic growth has not been inclusive and job creation is being stifled by regulatory barriers and uncompetitive markets and a rigid labour market.
Like most commentary on the economy, the report notes the limitations power outages had imposed, predicting that this will limit growth to 1.9 per cent for the year.
Among its key recommendations are: the removal of obstacles to job creation; targeted investment in social and economic infrastructure; the promotion of competition through reducing regulation; and the elimination of barriers for new entrants into the economy.
Most of these recommendations have been made repeatedly by the OECD and similar multilateral organisations. However, the recommendations on taxation are new and of particular interest as SA contemplates restructuring its tax regime and the Davis Tax Committee explores various options.
The OECD says although there will be public resistance to higher taxes, particularly in the face of government inefficiency and corruption, more revenues will nonetheless be required to meet the costs of SA’s infrastructural projects as well as the contemplated National Health Insurance.
At less than 30 per cent of gross domestic product, SA’s tax revenues are below the average of OECD emerging markets, which is around 35 per cent.
To increase revenues, the tax base should be broadened with personal income tax introduced for low earners sooner and deductions and allowances, such as those for interest income, reduced for high income earners. This would entail reversing some of the reforms made during the 2000s, in which personal tax thresholds were raised.
“The creation of a new first tax bracket with a lower marginal tax rate could also be considered, taking into account concerns about equity and ability to pay, as well as compliance. This could be accompanied by increases in the marginal tax rates on high incomes, which are lower than in many OECD countries despite SA’s high inequality,” states the report.
On VAT, the report says that while the system is well-designed insofar as a limited number of goods are zero-rated, these could be targeted better as the savings accrue disproportionately to better-off households. The VAT rate may also need to be raised to finance SA’s large spending plans.
The Treasury said it was significant that the OECD was broadly supportive of SA’s macroeconomic stance, while noting the risks to the economic outlook. It acknowledged the recommendations, many of which, it said, were already work in progress.
The independent power producers programme and the Davis committee were initiatives already undertaken by the government to address areas pinpointed by the OECD.