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Better-than-expected tax collections bring fiscal relief

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South Africa’s fiscal position has improved since the February budget mainly because of better-than-expected tax collections in the latter part of last year and higher corporate income tax collections.

Tax collections for the 2022/23 tax year has been revised upwards by R83.5 billion to R1.682 trillion. The broad-based recovery in corporate income tax bodes well for collections over the remainder of the fiscal year, Finance Minister Enoch Godongwana said in his Medium-Term Budget Policy Statement (MTBPS) on Wednesday afternoon.

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The positive impact of high commodity prices continued, and although it has been dissipating, there has been a more broad-based corporate tax recovery. The finance and manufacturing sectors have also experienced higher profitability that improved the near-term revenue outlook.

Tax collections

Personal income tax collections are expected to increase by 8% to R596 billion compared to the R588 billion forecasted in the February budget, corporate tax is projected upwards from R270 billion to R333 billion and customs duties is revised up by 11.5% to R72 billion.

The fuel levy and the net Value Added Tax (Vat) collections were revised downwards, by 8.4% to R80 billion (fuel) and 4.8% to R435 billion (Vat) respectively.

The downward revision was mainly because of the temporary relief offered against the massive spike in fuel prices earlier this year, and higher Vat refunds that offset the Vat income.

The payment of Vat refunds averaged R25 billion per month over the first half of the current tax year mainly because of increased capital expenditure in the finance sector and manufactured exports.

Economic risks

However, Godongwana warns that there are still “significant downside” economic risks to the revenue projections, and they may be lowered if power cuts intensify, global growth slows further or there is an escalation in the Russia-Ukraine war.

He also hinted at higher-than-budgeted public service wage costs that could restrain fiscal resources. “Additional fiscal measures or reductions in headcount would be required to contain overall compensation spending,” he says.

Economic growth remains tepid and over the medium-term period an average growth rate of 1.6% is expected. Further improvement in the tax-to-GDP ratio (25.3% in 2022/23) over the medium term depends on sustained economic growth and greater efficiency in revenue collection.

The BIG grant

As expected Godongwana extended the Covid-19 social relief of distress grant, introduced in May 2020, for another year until March 2024. Currently more than seven million South Africans are receiving the grant.

Godongwana says discussions are still under way to consider options for a replacement of the temporary grant and no final decision has been made about a replacement or how it will be financed.

National Treasury notes in the MTBPS that the introduction of a new grant will mean a permanent spending increase. “To be sustainable, it needs to be financed with permanent increases in revenue, spending reprioritisation, or a combination of the two.”

Given the large cost of extending the grant, increases to other social grants in 2023 will be slightly below inflation. “Other social welfare priorities may remain unaddressed,” Treasury notes.

Isaah Mhlanga, chief economist of Alexander Forbes, earlier noted that globally the cost-of-living crisis has been seen as a short-term problem that requires “temporary and well targeted solutions”.

He warned against turning the Covid-19 grant into a permanent universal Basic Income Grant (BIG). “SA cannot afford a welfare state. We have a 2% growth economy,” he said in a media-session leading up to the MTPBS. Given the latest growth rate projections it appears that SA will be a below-2% growth economy for the next three years.

Revenue – spending = Debt

Currently 59% of consolidated non-interest spending goes to the social wage bill, which include health, education, housing, transport, social protection and employment. Additional spending, including the one-year extension of the Covid grant will amount to R66.9 billion.

Government has also allocated additional spending of R8.9 billion for safety and security and R11.3 billion for infrastructure investment, including rehabilitating damaged municipal infrastructure and refurbishing provincial roads.

These spending increases will be funded from the higher-than-expected tax collections and an expected drawdown of the 2022 Budget unallocated reserve in 2023-24.

Consolidated revenue for 2023-24 is estimated at R1.953 trillion, expenditure at R2.242 trillion leaving the country with a deficit of 4.9% which is expected to narrow to 3.2% at the end of the medium-term period (2025-26).

The worrying debt levels is expected to “stabilise” at 71% of GDP in the current year and it is projected to stabilise at 69% of GDP in 2024-25. South Africa’s public debt has risen sevenfold, from R557 billion in 2007-08 to over R4 trillion in 2021-22.

Government expects both tax-to-GDP ratio and nominal revenue collections to be higher than pre-Covid projections going forward. “This assumes that most of the windfall tax from higher commodity prices [will] fall way over the next two years. The higher estimates partially reflect a permanent increase in revenue, most likely due to improvement in efficiencies at the South African Revenue Service (Sars).

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