Extra ‘solidarity tax’ for higher income earners to foot bill for Covid-19 crisis – govt document

By Antony Sguazzin

(Bloomberg) — South Africa won’t be able to meet its finance ministry’s debt targets and it may be undesirable for it to attempt to do so when the economy is being battered by the fallout from the coronavirus, according to an advisory panel appointed by President Cyril Ramaphosa.

In a more than 100-page document advising the government on an economic recovery program that Ramaphosa is due to unveil on Oct. 15, the President’s Economic Advisory Council said spending cuts could hold back growth and have other adverse consequences.

“We risk having nurses and doctors being unable to provide health services because of medicine stock-outs, teachers paid but with no learning materials or classrooms, police officials grounded in stations because there is not enough petrol to go out on patrol,” the panel said. “This undermines the progressive realization of socio-economic rights to health, education and basic services, and will reduce the efficiency of social spending, which is currently very poor, still further.”

The plan, which was submitted to the president and seen by Bloomberg, is an attempt to counter the effect of a pandemic that is expected to result in South Africa’s biggest economic contraction in almost nine decades. Finance Minister Tito Mboweni has said he plans to arrest the increase in debt levels at 87% of gross domestic product in the 2023-24 financial year, falling to 74% in 2028-29. Without an intervention, the ratio could climb to 141% over the next decade, he said.

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The advisory panel’s proposals build on a plan submitted by a group of labor, business and government leaders and another by the ruling African National Congress, which were considered by cabinet. Tyrone Seale, Ramaphosa’s spokesman, didn’t answer calls to his mobile phone or immediately respond to a message seeking comment.

The government should also boost an economic stimulus package to 15% of GDP, from 11%, and set up a rescue fund for businesses that were healthy before a lockdown was imposed in late March to curb the virus’s spread, said the panel, which has about 20 members ranging from academics and agricultural economists to a former Tanzanian central bank governor. It also called on the South African Reserve Bank to use the targeted long-term refinancing operations model piloted by the European Central Bank — a measure that offers banks long-term funding on attractive terms to stimulate lending.

Increases to the fuel levy and estate taxes should also be considered, as should a three-year “solidarity tax” that would boost income tax for higher earners, the panel said. It recommended that the state’s wage bill be curbed and increases to welfare payments be limited.

The panel criticized the government’s foot-dragging on encouraging the expansion of renewable energy output and delays in allowing private companies to generate more of its own electricity to end regular power cuts that have hindered economic growth.

“Those countries not adapting to a green transition will find themselves behind and excluded,” it said. “The constraints to achieving this do not lie in our natural-resource endowments, the availability of appropriate technologies, or even access to the necessary finance — it lies in our heads and in our political economy.”

Eskom Holdings SOC Ltd., the state-owned power monopoly, should be mandated to raise “large-scale concessionary climate-finance from the international community” in return for accelerating the closure of its coal-fired plants,” it said.

The council also said:

  • Pension funds and other private investors will back infrastructure projects if there is a clear pipeline for the next 10 to 20 years.
  • Allowing the construction of 5,000 to 6,000 megawatts of electricity generating capacity a year could encourage 500 billion rand ($30.3 billion) in investment and create 50,000 jobs.
  • 100 billion rand will need to be spent on the power grid by 2030
  • The introduction of a basic-income grant could cost 243 billion rand a year and would necessitate tax increases.
  • To accelerate land reform, an agriculture development fund should be set up, funded by the private sector and donors.
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