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The taxing issue of SA’s finances

Has there been a substantial deterioration in the economic environment that could warrant tax hikes?
Tax commentators don't expect significant tax hikes in 2019, but the election may delay the reforms and budget cuts the country desperately needs. Picture: Shutterstock

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.

Source: Tax Statistics 2018

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.

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With the country being so short of money and the small number of active tax payers it’s sickening to read that cabinet ministers pay only R1 200/m for their official houses that forms part of their already inflated perks. Why can’t this amount be doubled or trebled to generate more income!

I believe some of them “forgot” to pay even this low amount.

You are being insulting of their integrity – it is in fact a computor error (according to the cadre from housing). An impeccable source, you see.

For sure Louise.

Also, Govt will have plenty of money, if they stop the RDP-housing programme, remove all SASSA grants / cut pensions. Austerity measures.

Then they are really going to come for their land. Our forefathers’ hate for the african is going to bite on the back one of these days…

Someone should start running the numbers on tax revenue lost due to emigration…

Govt is busy with that: they hired the services of ex-president ZUMA to do the counting 😉

This is certainly an big issue. The people who emigrate are not domestic servants who do not pay tax. They are likely to be highly skilled high earners or high net wealth people short big taxpayers.

For a 45% marginal rate, high VAT, and high CGT and nothing in return there is little incentive to stay and pay for the largest cabinet on the planet, SAA, Eskom etc.

Wherever I go I hear talk about emigration- lawyers, accountants, doctors , engineers, entrepreneurs etc. Very sad reflection on the ANC-too dumb to look after the hand that feeds them!

I can’t imagine too many lawyers emigrating. Apart from the fact that what they’ve learnt to date doesn’t count for much overseas, where else are such easy and lucrative pickings available courtesy of ANC corruption?

What about administrative price increases? Eskom, water, property valuations, car licenses, ect.

The problem is mostly political.

Higher rates of taxes are a function of (i) a shrinking economic activity pool resulting in lower collections, and (ii) a Govt-service that remains way too large in size / unable to adapt to smaller economy.

There’s no political will to make SA an attractive FDI destination….which is the solution for growth & prosperity (Problem is govt will have to make structural economic changes, that won’t be popular with the majority electorate.)

So the other end will have to give: higher taxes, or new taxes (e.g. talk of “prescriptive asset management”…which is essentially a tax on retirement funds). The effect will be wealthier taxpayers/skilled persons of all races, will continue to emigrate. Corporates sitting on piles of cash, will allocate more on overseas ventures.

Fiscal cliff!

Make use of the ZAR/$ below R14 & externalise more money. Avoiding SA sovereignty risk…pure & simple.

…and let me GUESS what Govt may try, come next month’s Budget Speech:

“No nasty surprises” someone says?

Govt will do it again (as in 2015)…..a golden opportunity has arisen…now that Brent Crude Oil is down to $60pb, and the ZAR stronger in recent month….wham…huge hike in Fuel Levy for April’19. Back to R16+/liter…since we’ve been there already, the outcry will be less pronounced (as opposed to hiking individual or company tax).

TITO, are you reading Moneyweb?

Here’s what Socialism has done to this country! There are higher (and more) taxes coming!!

There is another solution.

Were the ANC to moderate its looting (as evidenced by the Bosasa revelations) and appoint more competents to balance its AA, cadre and crony appointments, the state would need far far less money and still be able to achieve more.

One suspects that rather than fantasise about this happening, a better option is to “vote the bums out”

End of comments.





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