Finance Minister Enoch Godongwana. Photo: Mlungisi Louw/Gallo Images
Ahead of this week’s budget, when the treasury is set to announce its plan to raise an additional R15 billion in revenue, Nedbank has warned that tax increases would be counterproductive.
Less than a week before the budget — which looks set to reflect the recent hit to the country’s public finances — Nedbank economist Isaac Matshego said hikes would go against the treasury’s efforts to reverse the tax increases announced between 2015 and 2018.
In 2022, Minister of Finance Enoch Godongwana announced a one percentage point reduction in corporate income tax, despite warnings it would not have the desired investment-boosting effect.
Matshego noted that at the recent World Economic Forum meetings in Davos, Switzerland, Godongwana said tax hikes were difficult to implement, though he was not ruling it out.
“That was the same message we got, by the way, in 2015, 2016, 2017 and 2018,” Matshego said.
He pointed out that during these years, revenue collection underperformed compared to the treasury’s projections, despite tax hikes.Referring to the percentage point VAT hike, Matshego noted: “The justification back then was South Africa, number one, had a low consumption tax relative to other African countries. And, number two, that VAT had not been adjusted since 1993.”
“But these tax increases were counter-productive in a weak economy.”
In 2018, the Parliamentary Budget Office (PBO) warned an increase in VAT leads to slow growth and can increase unemployment. This impact is, however, less significant compared to when personal and corporate income taxes are hiked.
Four years later, when corporate income tax was reduced, the PBO suggested that this would have a limited effect on investment.
The treasury’s decision to seek new revenue-raising measures was prompted by a sharp decline in tax collections compared to the projections in its 2023 budget.
Last year, the treasury projected annual revenue growth of 6% in the 2023-24 fiscal year. The medium-term budget policy statement revised this down to 2.6%.
According to Nedbank’s forecasts, there has been little improvement.
It flagged that taxes on income and profits trended close to pandemic-era levels during the first nine months of the 2023-24 fiscal year.
Behind this poor performance was a slump in corporate tax revenue.
Matshego noted mining revenues were particularly badly hit. According to the Minerals Council, the industry’s export revenue declined by more than 11% year-on-year in the first 11 months of last year.
Taxes on mining revenues buoyed the fiscus in the years that followed the pandemic’s economic bruising.
In the 2022-23 fiscal year, the government achieved a primary surplus — when revenue exceeds non-interest spending — for the first time since 2009. This was as the mining windfall pushed revenue collections R93.7 billion above the 2022 budget forecast.
But this picture has changed, as mining companies contend with a sharp decline in commodity prices, as well as the Transnet-induced squeeze on exports.
“Overall,” Matshego said, “looking at tax collections, they are well behind what was expected in the budget presented in February 2023 as well as what the medium-term budget policy statement presented in November 2023 said.”
“We are not doing good at all when it comes to tax collections.”
Whatever revenue-raising measures the treasury ends up pursuing would need to take into account their effect on different income groups, especially considering the ongoing cost-of-living crisis.
Wits University’s Public Economy Project recently noted that the government needs to limit the impact of its revenue-raising plans on growth, as well as on already pinched middle-class South Africans.
“The easiest option would be to resort to fiscal drag — an inefficient and inequitable sharing of the burden,” it said.
Alternatively, the government could make adjustments to tax expenditures, such as rebates on retirement contributions, which the project said “would ride on the relatively buoyant upper end of the personal income tax base”.
It added that increases to both corporate taxation and VAT should also be on the table.
Matshego said the treasury might consider hiking dividends or capital gains taxes. But the more likely outcome is the treasury withholds from adjusting higher income tax brackets against inflation.