Finance minister Tito Mboweni will table the medium-term budget policy statement (MTBPS) on 30 October, with early estimates expecting a revenue shortfall of between R50 billion and R90 billion.
As in previous years, the main culprit is once again a slower-growing economy, says Efficient Group economist Francois Stofberg.
“The government’s lack of accountable leadership should contribute between R30 billion and R50 billion to the shortfall,” he said.
He added that a slower-growing economy means:
- Fewer wage increase and therefore less personal income taxes (PIT);
- Fewer sales, and therefore less valued added taxes (VAT);
- Fewer profits, and therefore less company income taxes;
- Fewer imports and therefore fewer import taxes.
Stofberg said the excessively high levels of tax in South Africa are also contributing to this shortfall.
“A commonly accepted principle is that if taxes are too high, people stop paying; the incentive to find legal ways to avoid taxes becomes too large,” he said.
“The Laffer-curve is a smart theory that explains that at certain tax levels, which have been empirically shown to be around 50%, people start doing all they can to avoid taxes.
“So, as hard-working South Africans who pay 38% PIT, then a further 15% VAT on all purchases, another form of dividend and capital gains taxes on savings, import taxes and fuel levies – to name but a few – you quickly reach this 50% mark.
“So South Africans then start making friends with tax-specialists and restructure their income to pay fewer taxes.”
In addition to the shortfall driven by a slower-growing economy, the collection inefficiencies at SARS meant that year-to-date collections are 3% behind the target, Stofberg said.
“It might not sound like a lot, but 3% on roughly R1.8 trillion is R54 billion,” he said.
Stofberg said that if the shortfall persists, it will have dire implications on the budget deficit and debt levels.
“This will definitely have an impact on Moody’s, the only credit agency that still lists South Africa as investment grade in both our local and foreign currency-denominated debt,” he said.
While this is bad news for the economy, Stofberg said that the markets have already priced in possible bad news, in which case any decision should alleviate some of the pressures of uncertainty and help to appreciate the rand.
“Although, our base case is to see Moody’s downgrade our foreign, and not local debt, in which case there will be significant support for the rand to appreciate,” he said.