Increased R120bn tax collection windfall may not be sustainable

Fiscal risks, including unrelenting power outages, remain high.
Image: Waldo Swiegers, Bloomberg

A surge in global demand for commodities, resulting in higher prices, increased economic growth and higher than expected tax revenue benefitted SA, but it is “simply a once-off boost”.

Finance Minister Enoch Godongwana announced in his Medium-term Budget Policy Statement (MTBPS) that gross tax revenues are expected to exceed the estimates presented in the February budget by R120.3 billion, of which corporate income tax accounts for R75.5 billion.

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However, he warned that revenue collections remain well below pre-Covid-19 projections. There is still “profound uncertainty” about the durability of the economic recovery, mainly due to renewed volatility in global conditions and the risk of renewed Eskom power cuts, he warned.

Provisional corporate income tax collected in the first six months of the current tax year was 44% higher than the equivalent period in 2019/20, primarily driven by the mining and quarrying sector.

Stronger personal income tax receipts are expected to bring in an additional R26.1 billion relative to the 2021 Budget projections. Personal income tax accounts for an average of 38.4% of revenue over the next three years.

Other major tax categories have also grown above 2019/20 levels. This includes:

  • A strong recovery in earnings, with both nominal and real average wages close to 2019 levels by the first quarter of 2021, supporting personal income tax collection;
  • Higher export prices boosting profitability in the mining sector, and improved collections from manufacturing and finance;
  • Resilient household consumption amid the economic recovery, buoyed by strong earnings, low borrowing costs and larger social transfers, which strengthened domestic value-added tax (VAT) collections; and
  • Improved import volumes in the first half of 2021, offset by trade disruptions, leading to lower import VAT and customs collections.

Revenue for 2021/22 is now estimated to reach R1.5 trillion, compared to R1.4 trillion at the time of the 2021 Budget in February, Godongwana said in his speech.

Below pre-pandemic expectations

For the following two years tax revenue is expected to be R70 billion and R59.5 billion higher respectively. “Revenue collections remain well below pre-pandemic expectations, and in this sense the updated numbers flatter to deceive,” Godongwana remarked. Compared with the 2020 budget projections, revenue is expected to be R284.7 billion lower than forecasted until 2022/23.

Economists and tax commentators did expect revenue collections to be in excess of R150 billion for the current year, compared to the initial estimate in former finance Minister Tito Mboweni’s February budget.

Fiscal package

However, the windfall tax revenue will enable government to offer a fiscal relief package of close to R50 billion which include a R37.9 billion in direct fiscal support and another R11 billion that is earmarked for the South African Special Risk Insurance Association (Sasria).

The basic income grant will be extended until March next year, and should it be extended beyond that, funds will be allocated from other programs in the current budgetary framework, the minister said at a news conference.

The employment tax incentive has been extended from 1 August to 30 November at a cost of R5 billion in lost tax revenue.

The additional tax revenue will also go towards reducing the borrowing requirement. Failure to contain the public service wage increase (an additional R20 billion) will also eat away at the tax revenue windfall.

Structural constraints

National Treasury expects tax revenues to increase to R1.72 trillion, or 24% of GDP, by 2024/25. “The commodity price rally and resulting terms of trade benefits are expected to remain supportive for the rest of 2021/22, but export commodity prices are expected to decline, with an associated deterioration in the terms of trade in the outer years of the forecast,” treasury warned.

Government is only expecting a primary budget surplus – where revenue is higher than non-interest spending – by 2024/25, bringing the period of fiscal consolidation to an end.

Godongwana lamented the fact that greater economic output has failed to lift investment and employment, due to the structural nature of our economic underperformance. “Businesses remain constrained by longstanding obstacles like electricity shortages, inefficient and high-cost rail freight, inadequate broadband spectrum and red tape.”

Progress in implementing reforms, apart from some important steps to bolster competition in electricity supply and ports, remains slow, he admitted.

Government, again, promised to accelerate structural reforms to promote growth, while keeping fiscal consolidation on course to narrow the budget deficit and stabilise debt.

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