POLITICAL NEWS - As the sun has set on 2018 (albeit with a number of economic statistics still to be reported) the sun has risen on the year 2019 with the anticipated budget speech.
2018 was characterised by “Ramaphoria” that then met recession and ended with economic challenges, albeit at significantly lower levels than it could have been.
According to the South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) gross domestic product (GDP) is expected to grow by 0.7%, 1.7% and 2% in real terms between 2018 and 2020 respectively. During the same period, the current account deficit is expected to grow from 3.6% to 4.1%, putting further pressure on South Africa’s debt-to-GDP ratio.
The World Bank has referred to South Africa’s plan to further subsidise higher education as ‘fiscally unsustainable’. The World Bank qualified this statement by saying: “The cost of post-school education and training will more than double to R172.2 billion ($12 billion) by 2022, or 2.5% of gross domestic product, from R65.4 billion in 2017”. In October, National Treasury announced that the gross debt-to-GDP ratio is expected to stabilise around the 60% mark in 2023/24.
This paints a somewhat grim expectation of what can be expected in the 2019 budget speech, but will this expectation be realised? Improving the debt-to-GDP ratio involves raising revenue, reducing costs and ultimately expanding the tax base to raise revenue from wider sources. This may sound like a simple task but South Africa faces a monumental struggle against unemployment and social inequality which places strain on the available resources to meet the needs of the economy. This places National Treasury in a delicate position heading into the 2019 budget speech. The South African tax base is already severely strained and a number of the available revenue streams are simply over-extended at this stage. The three major revenue streams as a percentage of total tax revenue are depicted in Table 1:
Table 1: Top three revenue streams (2017/2018)
Personal Income Tax
Company Income Tax
Source: Sars tax statistics
Vat was raised from 14% to 15% in the 2018 budget speech. This was the first Vat increase in 25 years and was met with widespread criticism concerning the impact of the increase on lower income households. It would be highly unlikely that the National Treasury would alter this revenue mechanism given that it was increased as recently as last year and is seen as a regressive tax instrument as it places more financial strain on the poor.
Company income tax for corporates currently stands at 28%. Individuals may think that this is the rate that can be altered to raise additional revenue; however, a number of considerations must be taken into account. It is true that any additional revenue raised from sources that are not directly from consumers will benefit consumers – but this would be counterproductive given President Ramaphosa’s drive to attract foreign direct investment. Raising the company income tax rate would make South Africa a less attractive investment location as a rise in the tax rate would reduce the potential for profits.
Personal income tax has become the largest contributor to total tax revenue collected, however, the number of tax assessments has been declining as illustrated in Table 2.
Table 2: Number of personal income tax assessments
5 991 934
5 672 322
5 365 552
4 898 565
Source: Sars tax statistics
Table 2 indicates that the personal income tax burden is being spread across fewer and fewer individuals. Currently, the personal income tax revenue stream has been taxed to capacity as consumers deal with the current difficult economic times. This provides very limited scope for altering the personal tax rates in any meaningful way.
This provides National Treasury with a conundrum of where to source the additional revenue. If the debt-to-GDP ratio approached 60% by 2023/24 (as expected), it would place severe strain on the fiscus to service rising debt costs while maintaining service delivery. Heavily indebted state-owned entities are a further drain on available funds, however, restructuring these organisations could result in job losses which South Africa cannot afford given its persistently high unemployment rate.
2019 is an election year and history suggests that during an election year, controversial decisions (such as hiking tax rates) will be avoided in the interest of not alienating the voters.
The double-edged sword is that if revenue is not increased, South Africa will move closer towards unsustainable debt levels, however given the timing, it is unlikely that drastic changes will be made.
How National Treasury reacts to the current and future economic landscape will be particularly interesting when the eyes of the nation and the world fall upon the finance minister when he delivers the budget speech.