Supplementary budget tax revenue targets may be unrealistic

On 24th June, Finance Minister Tito Mboweni presented the supplementary budget in response to emergency measures taken to combat the COVID-19 pandemic.

According to Ettiene Retief, Chairman of the National Tax and SARS Committee at the South African Institute of Professional Accountants (SAIPA), the presented figures may not fully consider the knock on effects of the disrupted economy.

“While I have every confidence in SARS’ ability to collect available revenues, I’m not sure the Minister’s downward adjustments account for the coming reality,” he says.

Projections

Mboweni said that, in 2020, a global economic contraction of 5.2 percent is expected while the South African economy is expected to shrink by 7.2 percent. Unemployment had already risen to 30.1 percent in the first three months of the year and inflation is projected at 3 percent.

He also noted that the country is reliant on exports and this has been impacted by the collapse in global demand and restrictions on economic activity.

The projected total consolidated budget spending, including debt service costs, will exceed R2 trillion. Gross tax revenue for 2020/2021 is revised down from R1.43 trillion to R1.12 trillion, for a loss of R300 billion. Tax relief measures and adjustments result in a consolidated budget deficit of R761.7 billion (15.7 percent of GDP) up from the R370.5 billion (6.8 percent of GDP) stated in February.

Gross national debt will be R4 trillion (81.8 percent of GDP) instead of R3.56 trillion (65.6 percent of GDP) projected in February.

Real impact

According to Retief, even the adjusted tax revenue of R1.12 trillion may not be achievable. “Although companies are reopening, for many this will be a gradual process over the next 12 months which will hamper them from recovering the losses they suffered during lockdown,” he says.

He notes that other businesses will be forced to close, many employees will be retrenched from surviving ones, and remaining workers may be forced to take pay cuts of up to 30 or 40 percent. “We will have to wait another three months for the latest unemployment figures, so we can assume that current unemployment is much higher,” he says.

At the same time, consumer and business buying behaviours will change. Individuals may eat out less or holiday less, due to the risk of contracting the virus, resulting in lost revenue for local businesses. They may also defer purchases, like home improvements, because of lower pay. Likewise, companies will have less funds for business development.

Knock-on effect

“This has a snowball effect that affects vendors across the supply chain and further slows economic activity,” says Retief. He believes it is almost impossible to model the full extent of the fallout because each sector and industry will have a different recovery rate, which will be staggered across sectors and industries.

“All of these factors and the resulting slump will have a far-reaching and unforeseeable effect on tax collections,” says Retief. The government therefore needs to amplify its efforts to restart the economy if it wishes to achieve its target.