There are positive signs that it might not be necessary to increase tax rates this year and that there may even be room to give taxpayers full fiscal drag relief again (this is when tax brackets are shifted to take inflation into account rather than allowing inflation to move taxpayers into higher tax brackets).
Finance Minister Tito Mboweni will deliver his budget next Wednesday in an environment where there was a significant improvement in revenue collections in the fourth quarter last year, as well as an improved revenue outlook for the coming tax year.
Tax revenues for the pandemic year are likely to exceed the forecasts made in October by between R100 billion and R108 billion, says Kyle Mandy, PwC’s tax policy leader.
The projected shortfall is now R205 billion, still a massive amount by all counts, compared to October’s more than R300 billion. “This affords a degree of flexibility to National Treasury, and should have the effect of reducing pressure to raise taxes.”
In his June 2020 supplementary budget Mboweni announced the need for an additional R40 billion in tax increases over four years. The first increase of R5 billion was earmarked for the 2021 tax year.
Tax increase ‘unlikely’ to be implemented
Mandy says given a forecasted real GDP growth of 3.8% for the 2021/22 year, an inflation forecast of 4.4% and anticipated total tax revenue of R1.2 trillion it seems unlikely that the increase will be implemented. “Holding back on these increases will be more supportive of economic growth, he added during a PwC pre-budget prediction webinar.
PwC does expect an inflationary increase in excise and customs duties for alcohol and tobacco as well as an increase of 15c/l in the fuel levy. The Road Accident Fund is faced with growing liabilities and taxpayers may have to brace themselves for an above inflation increase of 30c/l.
PwC believes the current tax gap (the difference between what the South African Revenue Service (Sars) collects and what it should collect) could be as high as R200 billion.
“There is a significant opportunity for Sars to improve its revenue collection performance over the short to medium term without increases in taxes,” the firm says.
However, Sars is in need of additional funding in order to increase investments in technical skills it lost during the years of state capture and ageing technology.
Sars Commissioner Edward Kieswetter has indicated that it needs around R800 million in order to achieve its upskilling and improved technology objectives.
Mandy believes there will be some announcement in the budget to increase Sars’s resources.
Lullu Krugel, chief economist at PwC, says they predict an 8.8% contraction in GDP growth in 2020 compared to National Treasury’s 7.3%.
Mboweni expected a fiscal deficit of 15.7% of GDP in October – the largest on record for the year. “However, based on better than expected tax collections at the end of December, slightly stronger growth assumptions, and assuming no significant change in expenditure, this deficit could be revised lower to 15% of GDP,” says PwC.
Krugel says they are expecting the deficit to narrow even more to 13% and some commentators even predict a narrowing to 11% of GDP.
One thing that keeps standing in the way of a smaller deficit is the enormous public sector wage bill.
However, efforts to reduce it have been met with fierce pushback from trade unions. Reducing the wage bill, and bailouts to dysfunctional state-owned enterprises (SOEs), will remain politically difficult to achieve, she says.
PwC’s expressed wish for the 2021 budget is the announcement of a comprehensive cost-benefit analysis of the contribution of SOEs to society and the economy.
In PwC’s forecast scenarios it could take two years in an upside scenario for SA to return to pre-Covid-19 GDP levels. However, it could take four years in a baseline scenario – and seven years in a downside scenario.
Forecasts for the rand are equally depressing. In the upside scenario the rand will trade at R15.68 against the dollar in 2021, but R17.33 to the dollar in a downside scenario. By 2025 things look considerably worse for the rand, with an exchange rate of R16.65 in an upside scenario and R20.35 in a downside scenario.
There are just so many moving parts that will influence the country’s return to a pre-Covid situation, says Krugel.
The credit rating agencies are well aware of all those parts and the chances of them being satisfied with announcements in this year budget remain slim.
Even Moody’s, which has been more “friendly” and forgiving towards SA than Fitch and S&P, is losing patience, says PwC economist Christie Viljoen. This does not bode well for further downgrades of SA’s credit ratings.