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Government needs to raise an extra R15bn, which means tax increases are likely headed our way

19 February 2024 PwC

Amid continued large fiscal deficits, National Treasury could look at increasing Personal Income Tax or Value-Added Tax by 0.5 percentage points

PwC South Africa is pleased to share its second South Africa Economic Outlook report for 2024.

As a preview to Budget 2024, the report looks at selected economic and tax topics ahead of the budget speech on 21 February. A key observation is that PwC expects the finance minister to announce that National Treasury will go ahead with a planned increase in taxes towards raising an additional R15bn in revenue for the 2024/2025 fiscal year.

In many emerging markets like South Africa, fiscal space will be constrained in 2024 due to weak revenues and rising debt-servicing costs. Elevated debt, tight financial conditions and tepid economic growth is putting pressure on fiscal sustainability while increasing vulnerability to external financial shocks. The fiscal situation is also detracting from other government work as policymakers across many countries face trade-offs between maintaining fiscal stability and other priorities. These include investment in reaching Sustainable Development Goals (SDGs).

The Medium Term Budget Policy Statement (MTBPS) in November 2023 made downward revisions to National Treasury’s expectations for tax revenue in 2023/2024. Our projections, based on data from the first nine months of the 2023/2024 fiscal year, indicate that total revenue collections will be broadly in line with the revised estimates in MTBPS 2023. It is understood that National Treasury was hoping that revenue collections for the current fiscal year will exceed the MTBPS 2023 forecast; that the revenue outlook for the medium term improves alongside this; and that tax increases would not be necessary in 2024/2025.

PwC’s expectations for revenues to match the MTBPS 2023 forecasts reflect a balance between the positive impact of strong job growth on taxes and the negative impact of lower imports. Personal Income Tax (PIT) collections have been performing better than anticipated on the back of higher-than-expected job creation in 2023. Total employment increased by 6.2% y-o-y in 2023Q3 while basic salary/wages paid to employees in the formal non-agricultural sector increased by 7.2% y-o-y. In turn, customs duties and import Value-Added Tax (VAT) have been pressured by a drop in renewable energy investment and challenges to logistics processes at local ports. Imports declined by 9.0% y-o-y in December 2023.

We estimate that the 2023/2024 fiscal year will see a budget deficit equal to 5.1% of GDP. Looking ahead at the 2024/2025 fiscal year, the MTBPS 2023 pencilled in a deficit equal to 4.6% of GDP, while we project a figure equal to 4.9% of GDP. Our number is larger (more conservative) due to a more subdued outlook on economic growth; nominal GDP growth is a significant driver of tax revenue growth. For context, a budget deficit of 3.0% of GDP is deemed sustainable, with anything larger than this over a long period resulting in – as South Africa is currently experiencing – acceleration of debt servicing costs eating into the fiscal spending envelope.

Lullu Krugel, PwC South Africa Chief Economist, says:

South Africa’s fiscal space will be constrained in 2024/2025 due to weak revenues and rising debt-servicing costs. High and growing debt-service burdens are limiting the ability to invest towards the SDGs. For South Africa, this increases obstacles to tackling the country’s triple challenges of unemployment, poverty and inequality. Budget 2024 will need to show how, under constrained fiscal conditions and plans to increase tax rates, the South African government will prioritise financing of SDGs this year.

The finance minister has acknowledged in recent months that increasing taxes in the current economic environment would be difficult. By our estimates, to raise an additional R15bn in tax revenues would require increasing the PIT rates by 0.5 percentage points across all tax bands, or one percentage point on those earning more than R500,000 a year. Alternatively, National Treasury could look at increasing the VAT rate by 0.5 percentage points to 15.5%.

Kyle Mandy, PwC South Africa Tax Policy Leader, says

The MTBPS 2023 indicated the need to increase taxes to raise an additional R15bn in revenue during 2024/2025. Given that tax revenues this year are expected to be broadly in line with what was forecast in MTBPS 2023, we expect that National Treasury will proceed with tax increases to raise this amount. The key question is what form the tax increases will take, with a tough decision that needs to be made between PIT and VAT. Increasing either of these will draw the ire of hard-working South Africans.

President Cyril Ramapohsa said in his State of the Nation Address (SONA) 2024 that the R350-a-month Social Relief of Distress (SRD) grant will be extended beyond the current March 2025 expiry and improved towards income support for the unemployed. If additional funding is needed for a larger SRD or more permanent Basic Income Grant (BIG), PwC is of the opinion that a VAT increase, rather than a PIT increase, can be justified. An increase in VAT in order to fund social spending, particularly in the form of a means tested grant, is highly progressive in aggregate.

Another strategy to improve tax revenues is by increasing tax compliance. In November 2023, the finance minister said that, alongside measures to stabilise public finances and reform the economy, South Africa’s most effective way of funding the government is through an efficient tax administration. He indicated that the South African Revenue Service (SARS) will continue its focus on enforcing compliance in areas such as debt collection, fraud prevention, curbing illicit trade, voluntary disclosures, and encouraging honest taxpayers to comply voluntarily. South Africa’s tax gap (the difference between taxes legally owed and taxes actually collected) is an estimated R300bn.

PwC’s Taxing Times Survey 2023 found that 8% of survey participants ‘strongly agree’ and 43% of participants ‘agree’ that it has become easier to comply with their tax obligations. This majority of 51% is a six percentage point improvement from the 2022 results. Elsewhere, PwC EMEA Private Business Attractiveness Index 2023 ranked South Africa 21st out of 33 countries for tax and regulation matters. The report found that local senior management spends 9.7% of a typical week dealing with requirements like tax compliance imposed by government regulation. The ranking suggests that there is room for improvement when it comes to the paperwork and red tape involved in tax and other regulatory compliance. This, in turn, could help SARS increase tax compliance and reduce the tax gap.

Key content in this report includes:
- Global fiscal risk: Strain on public finances are detracting from SDGs, industrial and climate policies.
- Local tax trends: PIT collections better than forecast, offset by lower import VAT and customs duties.
- Budget deficit outlook: Tax increases likely in 2024/2025 amidst a continued large fiscal shortfall.
- Increasing tax compliance: PwC survey shows it has become easier to comply with SARS tax obligations.
- How PwC assists our clients with tax compliance and measuring their total tax impact.

PwC SA Economic Outlook - February 2024 here...

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