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A cash flow nightmare for taxpayers

22 February 2021 Gareth Stokes

I am not a big fan of 28 February because it is a day that signals significant outflows from my dwindling cash reserves. I, like many South Africans, have to dig into my short term savings to make my second provisional tax payment, top up my retirement annuity and invest in other tax efficient structures such as tax free savings accounts and section 12J funds. These are not unbudgeted expenses; but they always present cash flow nightmares.

Tax Freedom Day on 7 May

February is also a month during which we reflect on government’s track record of managing our taxes. We get to listen to the President’s State of the Nation Address (Sona) and the finance minister’s Budget Speech, both of which seldom live up to our expectations. The optimal application of taxes is paramount in a country where the average taxpayer worked 126 days to pay their tax dues last year. Yes, you read correctly, the money you and I earned until around 7 May 2020 went directly to the State! We will have to wait until 24 February 2021 to find out how much more of our incomes government will lay their hands on; but we can gain some insights by analysing the myriad pre-budget media releases doing the rounds today. 

Asset manager, Future Growth, reckons that tax revenue will be resilient in 2020/21 in an otherwise unsupportive economic environment. They say that revenue collections for the full fiscal year will exceed expectations by about R100 billion. Their position is supported by audit firm PwC, who say that tax revenues will exceed last year’s Medium Term Budget Policy Statement estimates by between R100 and R108 billion. Although this sounds like great news, you may want to hold your applause. What economists are not saying is that this outperformance comes against the dire estimates made early last year. At the time, the worst case revenue collection forecasts pointed to a R300 billion shortfall. 

“Resilient revenue was underpinned by robust VAT and corporate income tax collections,” writes Future Growth. They say that these improvements came on the back of high commodity prices which contributed to mining sector profits; the rebound of economic activity from a weak second quarter; and the end of certain COVID-19 tax relief measures. I pause here, for a moment, to grumble about the continuous trumpeting of Q3 and Q4 2020 growth and 2021 growth forecasts as noteworthy achievements. It will take years for our economy to return to pre-pandemic levels if the best we can do is muster 3to 4% growth! 

Jane and Joe Average in big trouble

The relatively good news on the corporate income tax and VAT fronts was offset by a dire warning for personal income tax collection. Personal income tax receipts, which make up a significant 40% of the country’s total tax revenue, remain constrained. “This is partially explained by lingering job losses despite the opening up of the economy following the hard lockdown in the second quarter of 2020,” writes Future Growth. They argue that a combination of low economic growth and benign inflation will afflict this revenue stream in the short term. 

The question Joe and Jane Average want answered is whether the poor collection performance will result in increases in personal taxes. Tendani Mantshimuli, consumer economist at Liberty, says the fear of an increase in personal tax is justified if one looks at the limited options that government has within the low economic output and low revenue context. Squeezing more from taxpayers could, however, prove difficult. “Personal income tax thresholds in South Africa are already at the high end with the tax base being quite small,” says Mantshimuli. “This will have shrunk even further with retrenchments and salary cuts that have been implemented to keep companies going [during lockdown]”. High income earners could see their marginal rates remain unchanged while those paying lower margins should not expect greater relief than that offered through bracket creep. 

Letting personal taxpayers off the hook

Neil Wolno: Acting CEO at FMI, a Division of Bidvest Life, says that insurers should be calling on government not to increase personal income taxes this year. “A tax increase on an already-stretched consumer’s wallet will have an immediate impact on their finances and many consumers are already re-evaluating their financial priorities,” he says. There are concerns that tax increases could see hard-pressed consumers cancelling their insurance policies to meet day-to-day expenses. Wolno notes that this risked reducing the number of citizens with cover on life insurance policies and lead to a greater dependency on government aid. 

Momentum Investments also believes that personal income tax rates will remain unchanged in 2021/22, per their Budget Preview note. But this writer expects the wealthy to come under renewed scrutiny as government attempts to address the worsening debt outlook. Social media platforms abound with rumours of a once-off wealth tax that might be implemented under a ‘solidarity’ tagline. The argument is that the wealthy in society should stand in solidarity with their poorer compatriots. Even so, PwC believes that consumers are safe. They say that some of the 2021/22 tax increases proposed in the MTBPS 2020 will not be introduced while those for the following years will be relaxed. A hike in the VAT rate is also unlikely, given it was recently increased from 14% to 15% and the negative knock-on impact such increases have on consumption. 

Government workers out of favour

The focus will be on reducing government expenditure and putting a stop to the drain caused by corruption and wasteful expenditure rather than raising revenues. PwC economists say that the finance minister will restate government’s commitment to reducing the public sector wage bill. It is a long overdue correction that will not illicit much sympathy from private sector workers. “The cumulative 40% real increase in wages over the past 12 years came without productivity gains and resulted in the crowding out of much-needed, growth-enhancing capital expenditure,” notes Future Growth. Cuts to government expenditure will have to be managed to prevent negative consequences for South Africa’s consumption-dependent GDP. 

Those of us hoping for an end to state-owned entity (SOE) bailouts will be disappointed. “Political pressures are likely to prevent the National Treasury from reducing the quantum of expenditure allocated to the bailout of SOEs,” writes PwC. And that means that taxpayers will read plenty more ‘R10 billion more to [insert your favourite SOE here]’ headlines through 2021 and beyond. Rating agencies are unlikely to be moved by the country’s rising debt levels either. Future Growth predicts that gross debt-to-GDP will reach 90.2% in 2023/24. “The deterioration of the South African fiscal position thus far still presents many red flags which signal the possibility of a public sector debt trap,” they write. Momentum Investments is more upbeat, predicting that the budget deficit for 2020/21 will be much lower than the 15.7% of GDP announced in the MTBPS. 

How 2020 gobbled more than five years’ accumulated growth

The bottom line is that South Africa needs to grow at an average of 3.5% per annum over the medium term in order to stabilise its debt situation. Such outcome is unlikely given our anaemic 0.8% average annual growth over the five years preceding 2020. Pay close attention: Our five-year accumulated growth is not even close to the 8% growth decline brought about by lockdown and pandemic last year. Economic prospects remain dire. “Without any long term targeted interventions that address the lacklustre growth environment and mounting expenditure, we find it hard to become overly optimistic,” concludes Future Growth.

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