Fading Ramaphoria and a risk to ratings
With little more than two months to go to October’s mediumterm budget, the fiscal news is not looking good, raising the prospect that the ratings agencies could again be on SA’s case later this year.
The focus in October tends to be on the spending side of the budget and at this stage it’s the spending risks that economists and National Treasury officials are mainly worrying about: the public sector pay deal that’s going to cost government R30bn more than it budgeted for, the bankrupt stateowned enterprises in need of bailouts, the tens of billions of rands of unpaid bills in the provincial government system, and more.
All of that raises the risk that the government could breach its self-imposed expenditure ceiling, raising red flags for ratings agencies, particularly Moody’s, which is the only one which still has an investment-grade rating on SA.
But the revenue side of the budget should also be cause for concern, and this is highlighted by the latest monthly figures from the Treasury which suggest that tax collections for the current year could fall short of budget projections yet again.
It’s early days yet: the monthly figures are for June, which is only the third month of the fiscal year. But June is the first of the big corporate tax collection months, so analysts can start projecting trends. And these are not good. Corporate and personal income tax collections are running well behind, and though the one-percentage-point hike in the VAT rate should now have taken full effect, VAT revenue is not yet jumping as expected, particularly import VAT which is forecast to grow at 10.9% against last year but is only growing 7.3%. Domestic VAT is forecast to grow 12.6% and is sitting at 11.6% currently, though this is likely to accelerate as the effects of the VAT increase come through (June was up 14.1% on last year). And it looks relatively healthy, notes PwC tax director Kyle Mandy, only because refunds are down 2.1% on last year versus forecast growth of 4.7%. Mandy projects a full-year revenue shortfall of R6bn-R10bn based on the latest monthly figures, and he estimates the projected shortfall would be much higher without the decline in VAT refunds.
The alleged manipulation of refunds was a theme of now suspended South African Revenue Service (Sars) commissioner Tom Moyane’s tenure, and it made headlines again on Friday with revelations from Scorpio’s investigative journalists that R420m of refunds were paid out to Guptalinked entities, amid allegations that
Moyane and his lieutenants were using Sars as a giant money-laundering racket.
Sars has been doing its own investigations, and no doubt much more will emerge when the Nugent commission into Sars resumes its public hearings on August 21. But the stream of scandal serves as a reminder of the risks to the revenue side of the government’s budget.
Those risks, which are about SA’s macroeconomic woes as well as about Sars itself, make the revenue targets in
February’s budget look optimistic, at best. The budget’s forecast of a 10.5% increase in revenue for the current year was always ambitious given that revenue grew only
6.3% last year. Ambitious too was the assumption about tax buoyancy, which was projected to increase from 0.96 to 1.51.
The tax buoyancy ratio tells us whether tax revenue is growing faster or slower than the economy, and it’s an important one to watch, because it is reflects the tax increases, which is why the forecast buoyancy is so much higher. The ratio declined during Moyane’s tenure, in large part because of the deep damage done to Sars as an institution.
It will take time and good leadership to undo that damage and rebuild tax morality and compliance. The acting commissioner, Mark Kingon, is determined to “do what is right” , but there are limits to how much can be done to turn Sars around in the absence of a new, permanent commissioner and leadership team. And with Moyane and his lawyers using every trick in the book to try to dodge his disciplinary inquiry, it doesn’t look like the institutional risks to revenue are going to be resolved speedily.
Nor are the macroeconomic risks going to go away any time soon. The February budget assumed a 1.5% growth rate for this year, rising to 1.8% next year. For the brief period of Ramaphoria, that looked too low: now it may well be too high, with the IMF and others cutting growth forecasts to 1.2% or lower.
Nor is it clear where growth will come from, given the policy paralysis in the run-up to next year’s election.
Chances are that the ratings agencies will wait to see what happens at election time. But SA’s fiscal and growth risks could well see them put us back on watch for a downgrade before the end of this year.
It is not clear where growth will come from given election policy paralysis