Tax red flags in South Africa: what to anticipate this week

South Africans should limit their expectations for an ideal budget delivery this week, and instead prepare for a more bleak reality, according to Professor Andre Roux, an economist at Stellenbosch Business School.

Roux stated in a pre-budget study on Monday (20 February) that finance minister Enoch Godongwana would have the difficult challenge of reconciling the expectations of all segments of society when it comes to budget planning – expectations that are sometimes diametrically opposed.

But, there is a significant difference between what people hope for, what people expect, and what reality can offer, according to him.

“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 fact, according to the economist, is that South Africa has a very high amount of debt. Throughout the past decade, the country’s debt has regularly expanded faster than GDP; as a result, the public debt-to-GDP ratio has reached a crisis level (about 75%).

At these levels, investors in government bonds, according to Roux, seek a higher interest rate to compensate for the increased 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.”

Moreover, government debt has been incurred primarily to cover current expenditure, such as public servant wages, social handouts, and interest on previously committed 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 sum, he stated, the government is simply not in a position to implement the planned policy strategy to offset recessionary conditions because of excessive non-growth borrowing in the past.

Dreams and hopes

According to Roux, different South African sectors have high aspirations for the budget:

• 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 greatest of intentions, it is impossible to fulfil this wish list in its entirety, according to Roux.

To begin with, the potential amount of government expenditure will be capped by a relatively little increase in the tax base as a result of the constricted economic growth scenario.

“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-stricken South Africa, two areas of expenditure have taken centre stage, according to Roux.

The first is the Eskom situation, which will very certainly consume a large amount of resources. This will take the shape of increased finance for power utility deficits as well as fuel allocations to protect the country from reaching stage 8.

The second is social expenditure, which President Cyril Ramaphosa promised at his State of the Nation Address. Already, social spending accounts about 17% of overall government spending. Roux believes that this type of funding is unlikely to decrease.

The main concern, however, is that another critical sector of government expenditure, which has a significant impact on the public debt trajectory, will also be involved. This is the pay of government personnel, which amounts to about 15% of GDP – one of the highest percentages 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.

Roux advised South Africans to moderate their hopes and desires when it came to taxation.

• 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.”