What to tax? South Africa’s budget

What to tax? South Africa’s budget

South African Finance Minister Pravin Gordhan will deliver the 2017 budget on Wednesday. Political instability, slumping commodity prices and corruption

South Africa's Minister of Finance Pravin Gordhan delivers the 2010 budget speech at parliament in Cape Town February 17, 2010. South Africa will only gradually reduce it deficits to help accelerate recovery from recession, the Treasury said on Wednesday, but investors warmed to a pledge to keep a totemic inflation targeting policy. REUTERS/Nic Bothma/Pool (SOUTH AFRICA - Tags: POLITICS BUSINESS) - RTR2AFJJ

Photo: Nic Bothma/Reuters

South African Finance Minister Pravin Gordhan will deliver the 2017 budget on Wednesday.

Political instability, slumping commodity prices and corruption have choked off growth in Africa’s largest economy. South Africa’s mid-term budget last October signalled that an additional $3.1 billion in taxes had to be raised over the next two years to stabilise the economy, but revenue sources are limited.

The government is unlikely to increase corporate tax rates as South Africa’s current rate of 28% is already higher than African averages. Any increase could further deter foreign investment.

Increasing sales taxes is also unlikely: while profitable, it would disproportionately affect South Africa’s poorest – a risk that the deeply unpopular President Zuma will want to avoid. If they do, any sales tax increase will be accompanied by pro-poor measures to offset these effects.

Rather, it seems more likely the government will announce an increase in income taxes – the largest source of revenue – as well as a fuel levy hike.

If Gordhan’s budget isn’t conservative enough, it risks damaging investor confidence, potentially causing the rand to devalue. Yet if measures are too punitive, Wednesday’s budget could exacerbate South Africa’s economic woes. A fine line indeed.