South Africa heading for a serious crisis

[Nat Quinn]

Renowned economist Dawie Roodt warned that South Africa is heading for a serious financial crisis, with an overburdened tax base and out-of-control state spending.

Roodt told Nuuspod’s Izak du Plessis that South Africa’s finances are in deep trouble with rising debt and stagnating tax revenues.

As a result, Finance Minister Enoch Godongwana is looking for ways to generate more tax revenue. However, it is easier said than done.

Most of the low-hanging fruit has already been picked, which leaves the minister with a tough task to lift revenue.

Roodt pointed to the Laffer curve, which shows the relationship between tax rates and the amount of tax revenue governments collect.

The Laffer curve theory is built upon two extremes.

• If the tax rate is 0%, tax revenue would be 0.

• If the tax rate is 100%, no one will work, and the tax revenue would also be 0.

If the tax rate is incrementally decreased from 100% to 0%, the tax revenue will increase to an optimal point where tax revenue is maximised.

It would decrease to 0 as the tax rate becomes too low to generate tax revenue effectively.

The government’s goal would be to reach the optimal tax rate to generate the highest tax revenue – the revenue maximising point.

Roodt argues that South Africa is already on the wrong side of the Laffer curve, which means an increase in personal income tax or company tax can result in lower collections.

When overtaxed, people often leave the country, avoid paying taxes, or use complicated structures to lower their tax burden.

“The reality is that the finance minister has exhausted all the easy ways to increase tax revenue. There is no simple way to collect more tax,” he said.

South Africa heading towards a financial crisis

Efficient Group chief economist Dawie Roodt

Roodt said South Africa has reached debt levels never seen before, and with a struggling economy and stagnating tax revenue, the country is heading for a financial crisis.

“We have never been in such a dire situation before. The debt levels have reached record levels, exacerbated by the troubled state-owned enterprises,” he said.

He explained that the state guarantees much of the state-owned enterprises’ debt. “The reality is, therefore, much worse than what it looks like,” he said.

“If we continue down the current path, we are in for a serious crisis. I cannot overstate the risk the country faces,” he said.

He said the only way to prevent a disastrous financial crisis in South Africa is for the government to cut spending.

However, there is a challenge. When a government cuts spending, people get angry and stop voting for the ruling party.

“So, we have a political problem. Politicians are aware of the financial situation but are not prepared to cut spending if it will cost them votes,” Roodt said.

South Africa has, therefore, painted itself into a corner because of the mismanagement of the economy by the ANC government.

The endgame is that the government will be forced to spend less. This will not be by choice but rather that they ran out of money.

 

source:South Africa heading for a serious crisis – Daily Investor

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