Finance minister Tito Mboweni’s special adjustment budget has highlighted just what South Africa is up against as it fights a debilitating Covid-19 pandemic, rising unemployment, and a mountain of debt.
Mboweni’s supplementary budget showed that gross national debt will be close to R4 trillion, or 81.8% of GDP by the end of this fiscal year.
This is compared to an estimate of R3.56 trillion or 65.6% of GDP projected in February. He noted that in the February Budget, it was expected that the global economy would expand by 3.3% in 2020 – now the expectation is that there will be a global contraction of 5.2%.
“This will bring about the broadest collapse in per capita incomes since 1870. Throughout the world, tens of millions of workers have lost their jobs. South African unemployment increased by one percentage point, reaching 30.1% in the first three months of this year,” Mboweni said.
“The South African economy is now expected to contract by 7.2% in 2020. This is the largest contraction in nearly 90 years.”
Mboweni said that government expects to miss its tax revenue target by over R300 billion this year. Gross tax revenue collected during the first two months of 2020/21 was R142 billion, compared to the initial forecast of R177.3 billion for the same period.
“Put another way – we are already R35.3 billion behind on our 2020/21 target. As a consequence, gross tax revenue for the 2020/21 fiscal year is revised down from R1.43 trillion to R1.12 trillion. That means that we expect to miss our tax target for this year by over R300 billion,” he said.
According to Ettiene Retief, chairman of the National Tax and SARS Committee at the South African Institute of Professional Accountants (SAIPA), the presented figures may not fully consider the knock on effects of the disrupted economy.
Retief said that even the adjusted tax revenue of R1.12 trillion may not be achievable. “Although companies are reopening, for many this will be a gradual process over the next 12 months which will hamper them from recovering the losses they suffered during lockdown,” he said.
He noted that other businesses will be forced to close, many employees will be retrenched from surviving ones, and remaining workers may be forced to take pay cuts of up to 30% or 40%. “We will have to wait another three months for the latest unemployment figures, so we can assume that current unemployment is much higher,” he said.
At the same time, consumer and business buying behaviours will change. Individuals may eat out less or holiday less, due to the risk of contracting the virus, resulting in lost revenue for local businesses. They may also defer purchases, like home improvements, because of lower pay. Likewise, companies will have less funds for business development.
“While I have every confidence in SARS’ ability to collect available revenues, I’m not sure the hinister’s downward adjustments account for the coming reality,” he said.
“This has a snowball effect that affects vendors across the supply chain and further slows economic activity,” said Retief. He believes it is almost impossible to model the full extent of the fallout because each sector and industry will have a different recovery rate, which will be staggered across sectors and industries.
“All of these factors and the resulting slump will have a far-reaching and unforeseeable effect on tax collections,” said Retief. The government therefore needs to amplify its efforts to restart the economy if it wishes to achieve its target.
Proposals to bolster revenue collection
Treasury said that improved tax collection and administration will be an important element in achieving fiscal stabilisation.
In a media briefing following the minister’s speech, National Treasury director-general Dondo Mogajane said in response to the rising budget deficit, Cabinet approved that an “active approach” be taken to bolster revenue collection.
This, he said, would also deal with, among other things, issues of tax avoidance.
In the active scenario, government stabilises debt through a combination of reforms that boost economic growth and measures to increase revenue collection and lower expenditure.
“Cabinet has adopted the active approach. It has endorsed the target of a primary surplus by 2023/24, meaning revenue will exceed non-interest expenditure. This will require spending reductions and revenue adjustments amounting to approximately R250 billion over the next two years.
“These measures require difficult choices that will affect the economy and distribution of public resources.”
The South African Revenue Service (SARS) will aim to increase tax receipts by:
- Focusing on international taxes, particularly aggressive tax planning using transfer pricing;
- Increasing enforcement to eliminate syndicated fraud related to VAT refunds and import valuations;
- Expanding the use of third-party data to find non-compliant taxpayers;
- Improving the collection of debt due to the fiscus, and ensuring that outstanding taxpayer returns are filed and liabilities paid.
While no major tax increases were directly announced by Mboweni, Treasury’s supplementary budget shows that the country will face future tax increases to meet this shortfall.
It further noted that following five years of large tax increases, the 2020 Budget did not propose new tax measures.
“Given the extent of fiscal consolidation now required, however, both expenditure reductions and tax increases are necessary to stabilise debt.
“The active scenario assumes tax increases of R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25.”
Treasury said that the 2020 MTBPS (expected in October) will revisit these projections, and the minister of finance will announce tax policy proposals in the February 2021 Budget.