South Africa’s government has a real problem: it’s running out of money

 ·9 Oct 2020

Data out this week from the South African Revenue Service (SARS) shows that South Africa struggled to collect taxes, even before the Covid-19 pandemic hit.

Tax revenue collection has been below forecasts for some time, compounded by the fact that the country is in a deep recession. Debt levels continue to climb, as does the unemployment rate, while state enterprises remain a tied to constant bailouts.

President Cyril Ramaphosa has in recent weeks waxed lyrical about a plan to revive the country’s broken economy.

“Government has to a large extent run out of money and we are going to have to cobble money together,” he said recently. “The private sector will play a key role, government will lay a key role and we will all need to put shoulder to wheel to make sure this recovery plan works.”

With businesses feeling the pinch and households bearing the brunt of job losses, SARS’ ability to collect revenue has diminished yet again, said Peregrine Treasury Solutions.

SARS commissioner Edward Kieswetter in a parliamentary presentation on Tuesday (6 October), highlighted poor economic conditions, low business confidence and a lack of reliable electricity supply as some of the key contributors for the decline in tax revenue witnessed over the past few years.

Kieswetter said that SARS has also seen an increase in retrenchment, lower-wage settlements, reduced bonus payments and a slower growth in consumer spending over the year.

Of particular concern is that SARS tax directives for retrenchments in 2019/20 reflected a total of 287,000 versus 239,000 for the prior year.

This signals an erosion of the tax base, especially for PAYE, as the 287,000 represents a number of PAYE contributors that will are likely not to contribute to the FY2020/21 tax base unless reabsorbed into employment, SARS said.

Pay-as-you-earn tax (PAYE) refers to the tax required to be deducted by an employer from an employee’s remuneration paid or payable.

This is unlikely to improve as data from Q1 2020 showed an unemployment rate increase of one percentage point to 30.1%, while Q2 data from Stats SA showed that an estimated 2.2 million South Africans lost their jobs during the coronavirus pandemic – despite Stats SA showing an ‘improvement’ in the unemployment rate.

Kieswetter has previously said that as many as 30,000 companies have been forced to apply for tax directives, in the face of business rescue and liquidation.

Finance minister Tito Mboweni said in his his supplementary budget in June, that National Treasury expects a R300 billion tax revenue shortfall for the 2020/21 financial year, because of the Covid-19 pandemic. This, he warned, would severely constrain the country’s ability to pay back its debt.

Kieswetter said he didn’t think that the figure would be better than R300 billion.

He said that the revenue collection agency has seen a ‘steady number’ of retrenchments, companies applying for tax directives, as well as businesses applying for business rescue and liquidation.

BNP Paribas South Africa  said in a note that tax revenue conditions will remain challenging into 2021, “requiring a firm commitment to spending cuts, particularly payroll”.

BNP Paribas economist, Jeffrey Schultz, said: “We expect the unprecedented economic shock to have far reaching implications for tax revenues in the coming quarters, with the recovery in revenues likely to prove even more important in the second half of the tax year than the first half. The erosion of the tax base and growth capacity is likely to take time to rebuild.”

He noted that the year-to-date 20% y/y fall in revenue is only marginally worse than the 18.3% fall in FY2020/21 nominal revenue the National Treasury projected in June.

“Our monthly revenue tracking data shows that the worst seems to be over for VAT and corporate income tax (CIT) receipts as mobility improves, economic activity gradually normalises and tax deferrals come due.

“Even there, we expect revenue conditions to remain very challenging into 2021, as a number of SMEs had to close their doors in Q2, rebuild capital buffers on severely dented turnover and profitability, or both.”

In personal income tax (PIT) receipts, momentum is still struggling, likely reflecting the extent of the shock to the labour market in Q2, when 1.2 million jobs were lost in the formal sector and an estimated further 1 million in informal, agriculture and private households.

Over the medium term, revenues are likely to be the main pressure point for government finances, the financial services firm said. Tax revenue buoyancy is still tracking above, showing that it is more sensitive to economics lack than normal, it said.

“We do not think the MTBPS (Medium-Term Budget Policy Statement – 21 October) will hint at any additional tax hikes on top of the cumulative R40 billion (0.8% of GDP) for the next four years projected in the June supplementary budget. However, we expect the NT to continue beating the drum on the need to expedite structural economic reforms to generate higher levels of nominal growth and, ultimately, revenues,” said Schultz .

“As we approach the crucial Medium-Term Budget Policy Statement, concerns regarding government debt levels, embattled SOE’s, and an ailing economy and a shrinking tax base remain in focus,” said Peregrine Treasury Solutions.

BNP Paribas said that the MTBPS is not a policy document, and therefore unable to announce sweeping changes to tax policy or major deviations to spending appropriations provisioned in the February national budget.

“However, it does give the NT an opportunity to mark to market its deficit projections in light of materialising economic conditions,” it said.

Read: South Africa’s tax base is shrinking

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