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Tax Hikes Pointless in Weak Economy, South African Lender Says

Tax Hikes Pointless in Weak Economy, South African Lender Says
Illustrative image: Nedbank and Standard Bank, two of the Big Five banks in South Africa. (Photos: Papi Moake/Gallo Images and Waldo Swiegers/Bloomberg via Getty Images)

South African Finance Minister Enoch Godongwana’s plans to raise additional taxes as he tries to arrest runway debt will be ineffective given the battered economy, according to the country’s fifth-largest bank by value.

“Raising taxes in a weak economy is counterproductive, it will not raise that revenue,” said Isaac Matshego, a senior economist at Nedbank Ltd.

Godongwana in November signaled that he would announce new tax measures to raise an additional 15 billion rand ($787 million) in his Feb. 21 budget. The country is facing spiraling debt and growing spending needs that may be exacerbated by elections in which the ruling African National Congress risks losing its national majority for the first time since it took power in 1994.

Lifting taxes would likely squeeze already strained consumers and hurt corporates, particularly in the mining sector where weaker commodity prices and higher operational costs due to incessant power cuts and logistics bottlenecks have hurt profitability.

“We would not expect higher revenue to come from higher taxes. We saw that happening for instance with VAT,” Matshego said. “With the higher VAT, people just spent less, and there was a drop in tax collections.”

South Africa in 2018 jacked-up value-added tax on some goods and services to 15% from 14%.

Nedbank sees the economy growing 1.1% in 2024, compared with an estimated 0.3% last year.

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