Tax increases may not be enough to stop SA’s widening revenue gap

Mike Teuchert, National Head of Taxation at Mazars.

The possible tax increases hinted at during Wednesday’s Medium Term Budget Policy Statement (MTBPS) are likely to do very little to decrease Treasury’s R50.8 billion revenue shortfall - and may in fact ensure that even less revenue is collected next year.

This is according to Mike Teuchert, National Head of Taxation at Mazars, who says that Treasury will need to take immediate measures to shrink the revenue gap. “The new tax increases will only be tabled after the 2018 Budget Speech, by which time it will already be too late to make a meaningful difference to the current shortfall.”

In his speech, Minister of Finance, Malusi Gigaba, revealed that Treasury’s revenue shortfall was 38% higher than initial speculation, amounting to 4.3% of South Africa’s gross domestic product (GDP).

Teuchert adds that although the MTBPS did not outline any exact steps, Treasury’s likely plan to shore up the revenue gap was crystal clear. “What we do know is that South Africa’s contingency reserve has already been pared down to R16 billion over the next three years, in order to partially fund the shortfall. It is also clear that Treasury is going to borrow money to make up for most of the remaining shortfall, increasing gross national debt to 61% of GDP by 2022.

“Treasury is going to have several challenges with this, the first being that the contingency reserve that the Minister is drawing from is intended as an emergency fund for catastrophes. Secondly, creating more debt could send South Africa into a very dangerous economic spiral. Treasury has also stated that the repayment costs of this debt would be around 15% of GDP. If there are any more credit ratings downgrades in our future, this will also need to be adjusted upwards,” Teuchert explains.

Looking into 2018, Teuchert comments that significant tax increases are inevitable. However, he argues that higher taxes may in fact reduce the revenue that SARS is able to collect even further. “There is a simple theory in economics that when taxes pass a certain threshold, less revenue is generated. It can be argued that South Africa has already seen this happening over the last year. Direct international investment in infrastructure and industry has slowed significantly, coupled with the country’s corporate and dividends taxes having made us increasingly less competitive.”

“We believe that Treasury may once again take advantage of “bracket creep”, where inflation pushes individual incomes into higher tax brackets. Additionally, higher tax rates, especially for wealthier individuals are also expected. Again this may drive more wealthy taxpayers out of the country.”

Finally, Teuchert states that the most difficult decision for next year’s Budget Speech, is the one regarding VAT. “Treasury dismissed the prospect of raising the VAT rate in February of this year as it was a political ‘hot potato’. However, if the Minister had raised VAT by 2 percentage points earlier this year, SARS would have been able to collect an estimated R40 billion from that alone.”

He notes that raising VAT has now become inevitable and even more difficult at the same time. “The national election is coming closer, and the political pressure on Treasury to keep VAT the same is even higher. We also believe that raising VAT in 2018 might be too little, too late,” Teuchert concludes.