“The tax base is narrow and revenues are too small to meet future spending needs,” the Paris-based group of 34 developed nations said in its Economic Survey on South Africa, released on Friday. “The public sector will face considerable resource needs in the years ahead to expand social and economic infrastructure. Meeting these needs will require increased revenues.”
South African Finance Minister Nhlanhla Nene raised taxes on middle- and high-income earners for the first time in two decades in February to help bolster revenue in the face of sluggish economic growth. He is seeking to narrow the budget deficit to 2.5 percent of gross domestic product in the year through March 2018 from an estimated 3.9 percent this year.
The government began a review of its tax system last year, led by Judge Dennis Davis. The panel recommended in a report this month that the government raise value-added tax rather than lifting personal and corporate taxes.
The OECD said South Africa should proceed with the implementation of a carbon tax and ensure that the rate rises gradually to be effective. This will align the nation’s climate change policy stance over time with those in most OECD countries and reduce the economy’s dependence on carbon-intensive production, the group said.
Implementation of the tax on the amount of carbon emitted by companies has been delayed since it was announced in 2012. Nene said in February that draft legislation will be published later this year.
While higher taxes, rising energy prices and wage demands may add to pressure on inflation, the “current monetary policy setting is appropriate for the near term,” the OECD said. The Reserve Bank may be tested if “core inflation continues to rise, even in the absence of faster growth.”
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