PwC sees tax hikes to plug holes
• Godongwana’s budget could raise either personal income tax or VAT
PwC has pencilled in an increase in personal income tax or in the VAT rate by the National Treasury to raise the additional R15bn in revenues that finance minister Enoch Godongwana announced he would need during the medium-term budget policy statement.
Godongwana will present the 2024 national budget, which is said to be one of the toughest budgets in years as it takes place against a backdrop of economic recovery efforts and possible fiscal slippage, in parliament on Wednesday.
He will have to walk a tightrope as he looks to the contentious issue of potential tax increases to boost revenues without placing too much additional pressure on South Africans in light of the cost-ofliving crisis.
In the economic outlook report published on Monday, PwC SA tax policy leader Kyle Mandy said given that tax revenues this year were expected to be broadly in line with what was forecast in the mediumterm budget in 2023, “we expect that the National Treasury will proceed with tax increases to raise this amount”.
Mandy said the key question was what form the tax increases would take, with a tough decision to be made between personal income tax or VAT.
“Increasing either of these will draw the ire of hard-working South Africans,” Mandy said. “By our estimates, raising an additional R15bn in tax revenues would require increasing the personal income tax rates by 0.5 percentage point across all tax bands, or by one percentage point for those people earning more than R500,000 a year. Alternatively, the VAT rate would need to increase by 0.5 percentage points to 15.5%.”
According to PwC, SA’s personal income tax collections have been performing better than anticipated in 2023/24 on the back of higher-than-expected job creation in 2023.
Total employment increased 6.2% year on year in the third quarter of 2023, while basic salaries and wages paid to employees in the formal nonagricultural sector rose 7.2%.
VAT collections were set to be in line with expectations, Mandy said.
“However, this carries both good and bad news. Import VAT contracted 5.4% year on year in December and has been weighed down by challenges in moving goods into the country,” he said. “On a positive note, domestic VAT has held up relatively well, with retail sales up 4.9% year on year in September-November 2023.”
He said that while Godongwana had acknowledged that increasing taxes in this economic environment would be
difficult, PwC expected the Treasury to go ahead.
PwC estimates the 2023/24 fiscal year will see a budget deficit equal to 5.1% of GDP.
This is slightly larger than the 2023 medium-term budget projection of 4.9%, due in part to a poor performance by companies with a December 2023 financial year end. The Treasury pencilled in a deficit equal to 4.6% of GDP in 2024/25, while PwC projects 4.9%.
Oxford Economics said South Africans should brace themselves for a wider budget shortfall, with debt levels rising. Senior economist Jee-A van der Linde said Oxford Economics maintained the 2023 mediumterm budget gave a bleak update about the country’s finances and argued that, despite the Treasury’s proposed spending cuts, market euphoria was overdone.
“The cumulative government shortfall for the first nine months of the 2023/24 fiscal year is equal to 5.7% of GDP versus the government’s forecast of 4.9% of GDP for 2023/24 as a whole.
“Given the economy’s weak performance, we anticipate further fiscal slippage and forecast the budget deficit to come in at 5.5% of GDP in 2023/24 and 5.3% in 2024/25.”
He said high spending pressures — because of underperforming state-owned enterprises, hostile public sector wage demands, and social support — balanced against a weak domestic economic outlook meant the budget deficit would remain wider than the Treasury’s average projection of 4.1% of GDP over the medium-term expenditure framework.
Commenting on what the Treasury might do to raise the extra R15bn, Van der Linde doubted it would increase personal income tax further given the weak economic state.
“We [also] do not expect the corporate tax rate to increase. The government would want to avoid raising VAT as far as possible ahead of this year’s elections, and so we expect the Treasury to target other indirect increases instead, which consumers tend to be less aware of,” he said.
He added that the government’s apparent desperation to find alternative sources of revenue was evident in the Treasury’s exploration of tapping a portion of the roughly R500bn gold & foreign exchange contingency reserve account.
“We argue that in principle such a move is not unseemly per se, but rather an easy way out and only a temporary fix.
“Furthermore, we have pointed out that it has become more widely apparent to others that government debt as a portion of GDP will breach the 80% threshold over the next few years. The Treasury’s proposals on Transnet will be significant in this regard,” he said.
Van der Linde said Oxford Economics believed government debt would reach 85% of GDP over the medium term.
The Treasury expects gross loan debt to stabilise at 77.7% of GDP in 2025/26, which is 4.1 percentage points higher than anticipated in February 2023.