Over the last few years, South Africans have had to stomach substantial tax increases.
As economic growth faltered, as credit downgrades took effect, and as public funds got siphoned off through state capture, the paltry state of the country’s finances was laid bare. Tax morality suffered.
As a last-resort effort to stabilise South Africa’s fiscal situation, government raised value-added tax (Vat) to 15% in 2018, a move projected to add R23 billion to state coffers.
According to the 2017/18 Tax Statistics published by National Treasury and the South African Revenue Service (Sars), the tax-to-GDP ratio grew from 23.9% in 2010/11 to 25.9% in 2016/17 and fell marginally to 25.8% in 2017/18. Tax buoyancy – the performance of revenue growth in relation to economic growth – has deteriorated substantially over the last few years.
South Africa’s personal income tax burden increased from 8.3% of GDP in 2010/11 to almost 10% in 2017/18. For individuals earning more than R1.5 million per year, a new income tax bracket of 45% was introduced in 2017.
Tax commentators have warned for some time that further tax hikes may not result in additional tax revenue and that government needs to turn its attention to the country’s expenses – wages and interest payments in particular.
The debt burden of state-owned entities like Eskom is one of the biggest concerns for the country’s economic outlook and fiscal position.
During the October Medium-Term Budget Policy Statement, Treasury said it did not anticipate that personal or corporate tax rates or Vat would be increased over the medium term, unless the economic environment deteriorated substantially.
“At this stage, revenue projections assume no changes to tax rates, but provide for annual adjustments to personal income tax brackets, levies and excise duties in line with inflation,” it said.
Votes versus fiscal consolidation
Against this background, the question is whether the economic environment has deteriorated substantially since October to the extent that it could force Treasury’s hand? While politicians will want to avoid tax hikes in an election year, an indication that government has lost its commitment to fiscal consolidation could trigger more credit rating downgrades, which would put further pressure on the country’s finances.
There seem to be early indications that the economy will remain under pressure in 2019. The World Bank on Wednesday lowered its economic growth forecast for South Africa from 1.8% to 1.3%.
Kyle Mandy, tax policy leader for PwC South Africa, says it is a bit early to make predictions around tax hikes with any degree of certainty. At this stage, revenue collection data is only available for the period to the end of November. December is a crucial month for revenue data.
“That said, it does look like there has been some slippage, if you like, in terms of the revenue performance in October and November.”
While the situation is not looking entirely positive at this point, there is still a possibility that it could turn around over the next couple of months.
It is difficult to say what would be regarded as a substantial deterioration, but it does not look like South Africa will see the type of shortfalls experienced during the last couple of years, especially once the Vat refund issue has been addressed, Mandy adds. National Treasury revised the Vat refund estimate upwards by R9 billion in October and indicated that about R11 billion would be paid out to clear the backlog in the Vat credit book.
Nasty surprises unlikely
It doesn’t look like there are going to be any horrible surprises in the budget, but it also doesn’t look like government is on track to meet the revised forecasts from the mini-budget unless something changes in the next couple of months, he says.
Keith Engel, CEO of the South African Institute of Tax Professionals (Sait), says there has been something of a deterioration in the economic environment, but even though the economy is not doing great, tax increases seem unlikely.
The real money comes from increases in indirect taxes like Vat, but such steps would cause an outrage with the ANC electorate.
“They are not going to raise Vat by another percent,” says Engel. “There is no way.”
Income tax hikes will either chase away investment or not result in additional tax.
Engel says while there may be adjustments to excise taxes, limited adjustments for salary increases and the introduction of the carbon tax, he doesn’t expect major tax increases.
Rather, there will be a focus on improved revenue collection through Sars.
Finance Minister Tito Mboweni extended Sars acting commissioner Mark Kingon’s term by another 90 days from December 13. President Cyril Ramaphosa is yet to appoint a permanent commissioner following Tom Moyane’s dismissal.
The real challenge government is facing is that it needs to tackle expenditure. Although there has been reprioritisation of some budgets, any meaningful reforms and budget cuts will likely be postponed until after the May elections.
In the meantime, South Africa will remain in limbo.