Tax revenue for the current fiscal year could fall short of the medium-term budget policy statement (MTBPS) forecast by at least R10 billion after corporate and personal income tax collection slowed in the last few months of 2018.
Tax revenue growth has not been as buoyant as expected, and as economic growth continues to disappoint, finance minister Tito Mboweni is under pressure to rein in spending to keep the country’s growing debt burden and deteriorating fiscal numbers in check. This as the election approaches and ratings agencies keep a watchful eye. His budget speech will be delivered on February 20.
In his MTBPS in October, Mboweni revised the tax revenue projection for the 2018/19 year down by R27 billion due to a Vat refund backlog, an underestimation of refunds and slower corporate income tax collections.
Since October, revenue performance has deteriorated significantly, says Kyle Mandy, tax policy leader at PwC.
Given the deterioration and the downside risks, PwC expects revenue to fall short of the revised MTBPS number by at least another R10 billion – R37 billion less than the 2018 budget forecast for 2018/19.
In February 2018, Treasury expected revenue to grow by 10.6% in 2018/19, but by December, growth had only reached 7.6%. Amid a slowdown in economic growth, corporate profitability suffered and corporate income tax revenues, which were expected to grow 6.5% during the full fiscal year, saw a contraction of 1.1% in the fiscal year through December. Personal income tax collection also disappointed (see below).
“The downside risks for the remainder of the year are significant as well, so it [the shortfall] could actually be worse than that and I wouldn’t be surprised if that goes out to about R15 billion by the time we get to the end of the year,” Mandy says.
But even though revenue collection continues to disappoint, and new spending pressures emerge, analysts generally don’t expect to see significant tax hikes in this year’s budget. Treasury has arguably run out of room to increase tax collections through further rate hikes with regard to personal and corporate income tax and Vat, its three main revenue sources.
There is however the possibility of small tax increases in some of the relatively minor tax instruments, Mandy says. The one exception is personal income tax, where the tax brackets for higher income earners may not be adjusted to grant full relief for inflationary salary increases.
“Overall we think Treasury is going to struggle to put through even R10 billion worth of tax increases in this year’s budget if they have appetite to put through anything like that number at all,” Mandy says.
PwC expects the budget deficit to widen from a projected 4% of GDP in 2018/19 to 4.3%. The deficit for 2019/20 is expected to deteriorate from 4.2% to 4.7%.
The projection assumes that expenditure does not grow beyond what was previously planned. Eskom is a major point of concern.
PwC chief economist Lullu Krugel says if things don’t go as planned on the expenditure side, the budget deficit could hit 5%, which would be “really detrimental”.
“The bottom line is that the turnaround keeps on moving out and the deficit becomes larger and obviously the ratings agencies are not comfortable with that.”
Although South Africa’s budget deficit is broadly in line with some of its emerging market peers, these countries – particularly India and China – have much higher economic growth rates, which puts them on a firmer footing. China’s economy is expected to grow 6.2% this year and India’s 7.4%. South Africa’s economic growth forecast for 2019 is around 1.3%.
Krugel says ratings agencies are hoping that South Africa’s economic growth improves to a level closer to 3%.
She says the likelihood that Moody’s will downgrade South Africa to junk is quite high, particularly against the background of the woes at Eskom.
“We are going to get junk status this year unless something significantly changes,” she says.