Tax shortfall is bad news for the public – PwC
Government collected so little tax last year that significant tax increases in this year’s national budget now seem inevitable.
Tax collection from April to December 2015 was “shockingly” poor, says Kyle Mandy, PwC South Africa’s technical head of national tax.
He says that aside from customs tax, the collection of all other taxes looks fairly poor.
Mandy says PwC is also expecting government’s income for the coming tax year (from March 2016 to February 2017) to be R20 billion less than the amount government used as a basis for its budget framework.
PwC’s estimates are based on the state of current tax collections and assumptions regarding South Africa’s economic growth and inflation for the coming tax year.
“Twenty-billion rand is quite significant considering it’s about 0.5% of our gross domestic product [GDP]. If something is not done about this, South Africa’s credit rating will be lowered to junk status,” says Mandy.
Credit rating company Moody’s also warned this week that poor economic growth expectations could have a negative effect on South Africa’s credit status.
Kristin Lindow, senior deputy head at Moody’s, warned: “The current levels of taxes and other monies that government receives falls short of government’s spending needs by between 3% and 4% of GDP per year.”
In the medium-term budget framework in October, Treasury was still expecting the economy to grow by 1.7% this year.
However, economists do not expect the country to reach this target at all, and the World Bank this week also lowered its forecast for South African growth this year to a meagre 0.8%.
Professor Jannie Rossouw, head of the University of the Witwatersrand’s School of Economic and Business Sciences, says: “The lower growth forecast for 2016 means that the targets that were set in the medium-term budget framework of 2015 for the tax year 2016/17 probably won’t be reached.
“Government has to cut down on expenditure to spend less than currently proposed by the medium-term budget framework, and the public should expect tax increases,” adds Rossouw.
Mandy says tax increases will, in general terms, be better for the economy than junk status.
According to him, PwC is expecting significant increases in personal tax and the general fuel levy to be announced in the national budget.
Sanisha Packirisamy, economist at MMI, says poor growth, low levels of job creation, high levels of debt and rising inflation will likely curtail collection of VAT and personal tax in the coming year.
VAT and personal tax each contributed around 36% to the total tax revenue in the 2014/15 financial year.
“Low commodity prices, and weak local and international demand, cause risks for the collection of company tax,” says Packirisamy.
She is of the opinion that tax collection from April to December wasn’t that bad.
She says the budget deficit for 2015/16 might even be a little smaller than the current expectation.
But this will only be the case if tax collection in the next three months is just as good.
Wayne McCurrie, chief portfolio manager at Momentum Wealth, says he doesn’t think this will happen.
“I think a part of the tax collection reflects an increase in sales due to people being scared of rising prices this year, and it is therefore not sustainable,” he says.
Peter Attard Montalto, analyst at investment group Nomura, says the markets haven’t yet grasped that the credit ratings agencies, especially Standard & Poor’s, intend to downgrade South Africa in the medium term to junk status.
“It’s not due to something being wrong in the budget per se, but because of the poor local economic outlook and an unfriendly investment climate,” says Montalto.