South Africa should cut corporation tax and keep COVID relief grant, says OECD

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By Rachel Sauvage

LONDON, Aug 25 (Reuters) – South Africa should cut corporation tax, increase VAT and maintain COVID-19 relief grants, while ensuring the poorest are not worse off , said the Organization for Economic Co-operation and Development (OECD) in a report on Thursday.

The government has handled the COVID-19 crisis relatively well and consumption and exports are supporting an economic recovery, the OECD said, but it warned that inflation, which reached 7.8% in July, and that power cuts were risks to growth.

South Africa’s economy returned to pre-pandemic size in the first quarter of this year, but rising prices and persistent power cuts have dampened growth, President Cyril Ramaphosa’s promise to reform the utility troubled electricity Eskom failed to materialize.

“Our progress in tackling unemployment, poverty and inequality remains insufficient,” South Africa’s Deputy Finance Minister David Masondo told a press conference at the launch of the report on Thursday.

“Low levels of productivity and competitiveness are holding back growth,” he said, adding that this was driving the government’s focus on “structural reforms.”

Monthly social assistance of 350 rand ($20.74) introduced during the pandemic provided crucial support to the unemployed and was “highly redistributive”, the OECD said.

However, Finance Minister Enoch Godongwana has previously warned that making it permanent would be extremely costly and investors have expressed concern over its fiscal impact.

The OECD expects South Africa’s economy to grow 1.8% in 2022, slightly below the central bank’s forecast of 2%, and 1.3% in 2023, matching the bank’s forecast.

The government’s 500 billion rand ($29.6 billion) support to the economy during the COVID-19 pandemic, equivalent to 10% of GDP, has helped growth rebound, Isabell Koske said , Acting Head of Country Studies at the OECD, at the press conference.

But, she added: “The recovery was interrupted by the aftermath of Russia’s invasion of Ukraine.”

Deductions undermine the progressivity of the tax system and reducing them would help reduce the country’s high inequality and increase tax revenues, which are below the OECD average, Koske said.

($1 = R16.8773) (Reporting by Rachel Savage Editing by Mark Potter)

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