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Budget 2020 - Navigating a challenging path to a sustainable fiscal position

21 February 2020 Momentum Investments

The challenges facing the South African (SA) economy are well documented, and perhaps larger than any faced in the post-democratic history of the country.

Over the last 5 years SA has experienced one of the weakest average growth rates in per capita gross domestic product (GDP) from a range of emerging economies. This leaves treasury with the challenge to increase revenue, as well as cut spending, in order to put the country on a path of fiscal sustainability.

According to Momentum Investments economist Sanisha Packirisamy, increasing revenue will be tough as business and consumer conditions provide a tricky setting in which to raise additional taxes.

“SA’s relatively high corporate income tax rate (28% in SA compared to a global average of 24.2%) and government’s desire to draw foreign direct investment towards the country suggest little scope to raise corporate income rates further. Similarly, an increase in personal income tax, SA’s largest source of revenue, would be difficult to implement in light of persistent consumer headwinds, including higher electricity tariffs, higher fuel prices, slower growth in nominal wages and rising unemployment.”

Raising the VAT rate will also be a challenge. Even though SA’s VAT rate is comparatively low on a global scale, an increase now would come at a time when growth in household spending has fallen below 1%, compared to 2.8% when the VAT rate was increased in April 2018.”

“Advancing capacity at the SA Revenue Service (Sars) to collect taxes, a decrease in tax evasion and fraud and a restoration in tax morality provide potential to alleviate pressure on revenue collection in the coming years,” Packirisamy continues.

She points out that subdued economic growth is unlikely to provide a boost in revenue prospects in the foreseeable future. “The weak momentum in the SA economy ultimately reflects chronic policy uncertainty, stretched government finances, infrastructure constraints and crushed confidence.”

These factors will translate into a revenue collection shortfall versus the medium-term budget of around R14 billion for FY2019/20 if VAT refunds normalise according to Packirisamy. Persistent tax revenue shortfalls in the last few years have materialised in spite of the implementation of additional tax hikes, including the 1% VAT increase and an increase in taxes for the top personal income tax bracket in recent years.

Cutting expenses might be arguably a bigger challenge than raising revenue in the current political environment. A bloated government wage bill and burdensome debt-service costs are crowding out other forms of more useful government expenditure. For every R1 000 spent on consolidated expenditure, R340 is currently paid to civil servants.

“Expenditure cuts have to come from the wage bill,” Packirisamy notes. “While an across-the-board wage freeze for civil servants is less likely, government could potentially achieve a significant portion of its intended savings of R150 billion, as announced in the Medium Term Budget Policy Statement in October 2019, through earmarking higher-income categories for wage freezes and bonus cuts, while implementing strict inflation-linked increases for the remainder. Whether there is the political will do this remains to be seen.”

Packirisamy further points out that a major concern is the ballooning government debt. “Over the last decade SA has consistently spent more than what we have earned and this shortfall has been funded by debt. This has resulted in debt-servicing costs growing at an average of 13.5% per year for the past eight years, making it our fastest growing area of spending. Currently, of every R1 000 spent by government, R115 is used to service government’s interest bill. Treasury has warned that without further fiscal measures, spending on debt-service costs will outpace spending in areas such as health and community development by FY2022/23.”

This balancing act will be closely watched by Moody’s, the last rating agency which has SA on an investment grade rating.

“The fact is that the depth of SA’s social and economic ills requires urgent and decisive action. With growth and fiscal outcomes continuing to surprise to the downside, we expect additional downgrades by both Moody’s and Standard & Poor’s Global Ratings (S&P) this year.

Recent comments from Moody’s that its 1 November 2019 rating was still “relatively fresh” and that there was “nothing really to flag for the time being” may suggest that, in the absence of a large negative shock in the budget on 26 February 2020, the rating agency may decide to leave its rating unchanged on 27 March 2020 and defer ratings action to 20 November 2020. In our view, the risk of a Moody’s downgrade of SA’s sovereign rating from Baa3 (the last rung of investment grade) to Ba1 remains high in 2020.” Packirisamy concludes.

MOMENTUM INVESTMENTS BUDGET OUTLOOK - Potential additional revenue measures and increases in existing taxes

Potential revenue measure

Likelihood of tax increase


Fiscal drag


Partial relief for fiscal drag is likely to lessen the impact on the poor but relief is unlikely to be granted to the higher tax brackets

Sin taxes


Above-inflation increases for duties on alcohol and tobacco products are expected

The 2019 national budget noted government intends to tax electronic cigarettes and tobacco heating products, but a date has not yet been set

Fuel levies


A hike in the fuel levy is expected

The 2019 medium-term budget indicated that the liability of the Road Accident Fund (RAF) is expected to grow to R605 billion in FY2022/23 from R341 billion in FY2019/20

Given the delay in the transition to a Road Accident Benefit Scheme, an additional hike in the RAF is likely

Medical tax credits


(below-inflation increases in short-term)

The 2018 national budget stated that below-inflation increases in medical tax credits for the following three years would assist government in rolling out the initial stages of the National Health Insurance (NHI) scheme

The new NHI Bill tabled in Parliament on 8 August 2019 suggested taxpayers’ medical scheme tax credits would be reallocated to the NHI Fund

Using these tax credits as an option to fund NHI is anticipated in the sixth and final phase of implementation, which is expected after 2022

Expat tax


(in effect from 1 March 2020)

R1 million limitation exemption for SA expatriates

PwC does not expect a significant inflow of revenue from this tax measure

Luxury goods tax


The Davis Tax Committee has warned against the difficulties of a tiered VAT rate and the associated administrative burden

These items (luxury vehicles, art and jewellery) could also be under-reported or undervalued

Wealth tax


This could include taxing fixed property under an additional national tax aside from at local government level, but this brings about challenges with the quality of valuation rolls

Financial assets could also be included, but may encourage dissaving

Higher transfer duties are less likely given the pressure on the residential housing market

Health promotion levy (sugar tax)

Medium likelihood of an above-inflation increase

The sugar tax generated R3.2 billion in its first year of implementation, but claims of financial and job losses in the affected industries pose difficulties in lowering the level for the exemption of the sugar tax

The levy should increase in line with inflation

Personal income tax


The personal income tax base is coming under increased strain from higher rates of emigration, higher levels of unemployment and poor economic growth

An attempt to improve compliance levels may help to reduce some of the slippage experienced in recent years



The perceived regressivity of VAT and a broader set of negotiations with labour lower the chance of a VAT hike for now

 In the longer term, this source of revenue could be tapped further, especially since SA’s VAT rate is relatively low by international standards

Company income tax


Comparatively high rate (SA’s company tax rate of 28% compares unfavourably to the global average of 24.2%) and the need to draw investment into SA limit the ability to raise company income tax

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