Red flags for taxes in South Africa – what to expect this week

 ·20 Feb 2023

South Africans should temper their hopes and dreams for an ideal delivery of the budget this week, and rather brace for a more grim reality, says Professor Andre Roux, an economist at Stellenbosch Business School.

In a pre-budget analysis on Monday (20 February), Roux said that finance minister Enoch Godongwana will have the unenviable task of managing the expectations of all sectors of society when it comes to setting the budget – expectations which are often diametrically opposed.

However, there is a big difference between what people hope for, what people expect, and what reality is able to deliver, he said.

“What we hope the minister will address is not the same as what we expect him to address,” Roux said. “To hope for something is to want something to happen or be true, while an expectation is what we think will happen.”

“In turn, expectations rarely match reality, i.e. what actually transpires. This gap between expectations and reality can lead to feelings of unhappiness, resentment, and even anger.”

The reality, the economist said, is that South Africa is sitting with an extremely high level of indebtedness. For the past decade, the level of debt on the country’s books has consistently risen at a faster rate than the GDP – consequently, the ratio of public debt-to-GDP has reached a critical level (approximately 75%).

At these levels, Roux said, investors in government bonds demand a higher interest rate to compensate for higher risk.

“As interest rates rise, it becomes more expensive to refinance existing debt and to finance new debt. Moreover, since more government revenue has to be allocated to the servicing of debt, less is available for crucial government services.”

In addition, government debt has been incurred to finance mainly current expenditure – including civil servant salaries, social grants, and interest on previously incurred debt.

“This means that the burden of the debt is exacerbated since it is not making any meaningful contribution to the future production capacity of the economy. ”

In short, as a result of excessive non-growth creating borrowing in the past, government is simply not in a position to embark upon the expected policy approach to counteract recessionary conditions, he said.

Hopes and dreams

According to Roux, there are high hopes for budget from various sectors of South Africa:

  • The corporate sector and investor community will hope for a significant trimming of the budget deficit, leading to a steady decline in the government debt-to-GDP ratio. They would also like to see a coherent programme of the selling off/ privatisation of dysfunctional state-owned enterprises, along with policy consistency and implementation, institutional competency and integrity, the further easing of the corporate tax burden, and the end of load-shedding.
  • Small- and medium-sized enterprises will hope for tax breaks, a relaxation of labour legislation, reduction in red-tape, and the end of load-shedding.
  • Middle-income households will be on the lookout for lower personal income tax rates, a credible and visible anti-corruption plan of action, a less volatile exchange rate, and the end of load-shedding.
  • Organised labour movements and the unemployed will hope for a significant increase in the number of job opportunities, higher minimum wages, and the end of load-shedding.
  • Public servants will hope for inflation-linked wage increases, a cessation of retrenchments, and the end of load-shedding.
  • The heavily disadvantaged members of society will be hoping for the extension of social grants, the lowering of the VAT rate, increased spending on education and health care, cheaper and more reliable transport, and the end of load-shedding.

Even with the best will in the world, it is impossible to deliver this wish-list in its entire, Roux said.

Starting with the potential level of government spending, this will be constrained by a very slim expansion in the tax base, on the back of the constrained economic growth environment.

“Last year, the commodity price boom and relative buoyancy of economic activity provided higher-than-expected tax revenue windfall. This year, the improved tax collection efficiency should enable SARS to meet its budgeted goals, but no additional windfalls are anticipated,” the economist said.

Reality

Back in the real world of crisis-hit South Africa, two areas of spending have taken centre-stage, Roux said.

The first is the Eskom crisis, which will likely draw a significant portion of resources. This will be both in the form of additional financing of the power utility’s deficits as well as diesel allocations to help keep the country away from stage 8.

The second is social spending, which was already promised by president Cyril Ramaphosa during his State of the Nation Address. Social spending already makes up 17% of total government spending. Roux said it is unlikely that this area of spending will decline.

The biggest worry, however, is that another key area of public spending, which has a major bearing on the public debt trajectory, will also come into play. This is the remuneration of government employees, which is equivalent to almost 15% of the GDP – one of the highest ratios in the world.

“A reduction – or at least a stabilisation – of this wage bill is, from a financial and economic perspective, justifiable. Politically, however, this could feasibly create a highly inflammable situation, particularly in light of the pre-2024 election volatility that possibly lies ahead,” Roux said.

In setting tax expectations then, Roux said that South Africans should temper their hopes and dreams.

  • The economist said that, as is customary, an increase in “sin taxes” is expected – this should include duties on tobacco and alcohol and possibly sugar taxes.
  • Echoing sentiments from some other economists, an upward adjustment to the fuel levy may also be on the cards.
  • While not a tax hike, South Africans should not expect relief in the form of cutting of tax rates – this includes for both personal income and corporate taxes.
  • Positively, a VAT rate hike is unlikely, Roux said.

Even at the best of times, the budget cannot be all things to all people, the economist said.

“In times of severe external constraints, and self-imposed internal structural imbalances, the limitations are even more stark. This year the gulf between various stakeholders’ hopes, expectations and the ultimate reality will possibly be greater than ever before.”

“That said, the majority of South Africans will probably hope to see, at the very minimum, a plausible, workable, and sustainable plan of action to minimise the debilitating impact of daily power shortages. Just as important is the desire for unequivocal evidence of the restoration of the competence and integrity of our democratic institutions.”


Read: Big tax changes to look out for next week

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