Gigaba evasive on tax increases, but expect it to happen

Cape Town - Finance Minister Malusi Gigaba was careful not to distress South Africans with visions of big tax hikes, but it seems inevitable that an increase, or possibly new taxes, will be on the cards in February next year.

The Medium-term Budget Policy Statement (MTBPS) states that South Africa’s stated policy aspirations and its social needs far exceed available public resources. “Moreover, there is little space for tax increases in the current environment. Any new policy proposals, or expansion of existing programmes, should address only the most effective and necessary interventions.”

The shortfall from tax against February’s projections is now estimated at R50.8bn for 2017/18, R69.3bn for 2018/19 and R89.4bn in 2019/20.

In his speech Gigaba said fiscal efforts considered to address some of the revenue shortfalls over the medium term would be “a mix of expenditure cuts and revenue increases". Announcements will be made on these fiscal efforts at the time of the 2018 Budget in February.

Gigaba also announced that the Cabinet has approved the release of the carbon tax bill to Parliament for formal consideration and adoption.

According to the statement tax revenue continued to grow more rapidly than GDP over the past five years, despite a declining rate of economic growth. This trend came to an abrupt halt towards the end of 2016/17 as South Africa entered a recession. Despite substantial tax increases over the past two years, tax revenue growth has barely exceeded the low rate of economic growth.

The statement talks about tax buoyancy – the expansion of revenue associated with economic growth – that has fallen significantly in the past two years.

“The lower outcomes in 2016/17 explain part of the shortfall in the current year. However, revenue growth has remained weak, even as the economy emerged from recession in the second quarter of 2017.

For the first six months of 2017/18, gross tax revenue grew by 5.9% year-on-year against a target of 10.7%. All tax instruments are performing poorly, with large shortfalls for personal and corporate income tax, and dividend withholding tax.

Revenue weakness reflects a number of economic factors, the statement reads:

• Growth in key sectors that have supported buoyant revenue collection – such as finance, retail and telecommunications – has slowed.
• Personal income tax collection has been affected by low bonus payments, moderate wage settlements, job losses and a slower expansion of public sector employment.
• Corporate income tax under-collections in the first half of 2017/18 resulted from persistently weak growth and commodity price volatility.
• Weak investment and household consumption led to a sharp contraction in imports in 2016, affecting VAT and customs duties
• The stabilisation of the rand has muted the buoyancy of import taxes and revenue on profits in traded sectors, such as mining.

* Visit our Mini Budget Special Issue for all the news, views and analysis.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter: Fin24’s top stories