National Budget: Tough decisions may be needed to deal with South Africa’s fiscal crisis

Published: 5 February 2021

South Africa needs to continue on a path of fiscal sustainability in order to accelerate economic growth, especially in the wake of the COVID-19 pandemic. 

South Africa was already facing a fiscal crisis before the COVID-19 pandemic. Stagnant economic growth, mounting debt and unemployment have characterised recent years. The government intends to close deficits in public finances and lower borrowings as stated in the MTBPS in October. We expect Finance Minister Tito Mboweni to highlight the following themes in the upcoming National Budget Speech, which is expected to be on 24 February:

Closing deficits in public finances and lowering borrowings

Closing deficits in public finances and lowering borrowings is likely to be one of the biggest issues that the Finance Minister is grappling with. In the 2020 Medium Term Budget Policy Statement (MTBPS) outlined in October last year, the Finance Minister outlined that he intends to implement large spending reductions of about R300 billion in the next three years, combined with tax increases. In the MTBPS, budget deficit was predicted to peak at 15.7% in 2020/21 but to improve to a figure closer to 7.3% in 2023/24. Debt is projected to stabilise at 95.3% of GDP by 2025/26.

Government should be able to achieve some savings due to winning a recent court case, which allows it not to implement the final year of the 2018 wage agreement. This would start to contribute positively toward reducing the public sector wage bill, which the Finance Minister mentioned in the MTBPS.

Increasing tax revenues

Minister Mboweni has previously stated that he is aiming to generate tax revenue of R5 billion for the 2022 fiscal year and R40 billion over the next four years. Essentially, the main budget revenue to GDP ratio will improve from the current 22.6% to 24.9% of GDP by fiscal year 2024.

Although the MTBPS forecasted a large deficit in tax revenue collection of R312.8 billion, and we are hopeful that this shortfall will decrease by February. This in light of signs that tax collections are starting to improve as for the first time this fiscal year, the monthly revenue collections in November and December showed an increase in collections from prior year. If this trend continues, the amount of tax hikes required may be reduced.

South Africa is already heavily taxed, with a small percentage of the population bearing a disproportionate share of the country’s tax burden. Increasing tax rates would place the already overtaxed tax-base under immense strain and could prove counterproductive to the economy.

Other ways to raise additional tax revenue are being explored such as the once-off ‘solidarity tax’, or ‘wealth’ tax. In our view, there is a low probability of government implementing these types of taxes to fund the roll out of the vaccine. Other funding options are likely to be explored first to avoid putting strain on the tax-base. At present details remain vague as to how such a tax would be implemented. If this were to be implemented, it would likely only affect individuals in the top income tax brackets and it would be more palatable if it is seen as temporary measure based on the social compact to limit the effects of COVID-19. 

Increasing taxes/duties on alcohol and tobacco is another option. However, the recent bans on alcohol and tobacco has obviously negatively impacted tax collections and it will not be possible to recover the taxes foregone as a result of these bans. Any future bans would also impact tax collection, so relying on increasing taxes in this area to drive revenue may be inadvisable, depending on whether government will again ban alcohol if COVID numbers increase.

Preserving jobs and, if possible, creating employment, is an absolute imperative for tax revenue collection. Tax on individuals is by far the biggest contributor to tax revenue. The second biggest contributor is VAT – which mainly comprises consumer spending by individuals. Therefore, loss of employment impacts directly on both the biggest and second biggest contributors to our tax base.

COVID-19 vaccine rollout

It is uncertain how the anticipated vaccine rollout will be funded and this is likely to be highlighted in the Minister’s upcoming Budget Speech. Funding options appear to be limited to either further curbing and reprioritisation of spending or considering a once off “solidarity” tax as a temporary measure.

Reducing spending across departments to reprioritise this spending to fund vaccines may, however, adversely affect economic growth and welfare over time.

Improving revenue collection capabilities

We believe that improving tax collection methods rather than further burdening compliant taxpayers will help to address the contraction in tax revenue. Increasing revenue collection capabilities should be an important focus point for the South African Revenue Service (SARS). Leveraging digital technologies can assist with freeing-up capacity in order to focus on areas where the tax system is being exploited.

Stabilising state-owned enterprises (SOEs)

As SOEs will be primarily responsible for the successful rollout of the public infrastructure programme, stabilising them is one of government’s top priorities. In the 2020 financial year, a number of bailouts were made to struggling state owned entities. In the 2020 Budget Speech, Eskom remained the top priority with a stable electricity supply. Provisions to get Eskom back on track will require continued financial investment.

Conclusion

Whilst we are hopeful for a better year ahead for South Africa, we still have a long road to travel on the path of fiscal sustainability in order to accelerate economic growth.