Lagging collections could lead to tax hikes

Johannesburg - Battered South African consumers face the possibility of another credit crunch. This will be the result of lagging tax collection, which could see government try to find new ways to plug its revenue gap. Consequently, tax hikes next year could well be an option.

Raising debt to plug any tax shortfall could be another option government could pursue, but this would place pressure on the country’s credit rating, which was downgraded to “junk” status in April. Cutting expenditure is in all probability the least likely avenue the state will pursue to balance its books.

On average, South Africans have been getting poorer since 2015. Gina Schoeman, a Citigroup economist, said this week at a conference that this trend would remain until 2020.

“Social tension is likely to rise from things like this,” she said.

SA Revenue Service (Sars) commissioner Tom Moyane told City Press this week that tax collection was behind target because the country was in a recession.

“We are in a technical recession, which tells you that all is not good. The economy is in the doldrums. We have problems. Therefore, as Sars, we are affected by external factors that are beyond our control,” Moyane said during an interview with City Press after an event at Sars’ Orlando East branch in Soweto to launch the new tax filing season, which started on July 1.

Moyane’s comments come amid the first recession since 2009, as well as depressed business and consumer confidence, and unemployment at a 13-year high.

In addition, more job cuts – which will have a knock-on effect on consumer spending and, consequently, the economy – are on the horizon.

AngloGold Ashanti and African Bank are looking to cut up to 8 500 jobs and 652 jobs, respectively.

The JSE said on Friday it could cut 60 jobs to save costs.

Investec economist Annabel Bishop said in a report this week that South Africa’s unemployment rate was forecast to increase over the next five and a half years, from 27.7% to 29% in 2022.

The International Monetary Fund (IMF) said this week it expected local unemployment to rise to 28% next year.

“We hope and trust that the reversal in the economy will happen in the shortest possible period so that we can see the gains that will enable us to extract revenue at about 10.5%. As it is now, we need to work hard to reduce that slippage,” Moyane told City Press.

“Sars is a resilient organisation. People who have not seen where we come from – they need to look into the past three to four years when things were really horrid and difficult... We will do everything possible.”

Finance Minister Malusi Gigaba said at the Soweto event that he was “mindful of the state of the economy” and for the tax collection target of R1.265trn to be achieved, the “economy needs to be kicking”.

Gigaba said that, at the mini budget in October, which will be his first, it would be announced whether the tax collection target had been changed.

“I’m optimistic. I believe in the art of the possible. If the economy performs better – who knows – we might outperform [the target collections target],” Moyane said.

In the first two months of Sars’ financial year, which started on April 1, the revenue agency collected total tax revenue of R135.2bn – up by just 5.8% when compared with the same two months in 2016, according to documents on the National Treasury website.

The extent of the increase in Sars’ tax collection so far doesn’t compare well with its target of R1.265trn for the year to March 2018. Sars is looking to increase tax revenue by 10.5%, or R122bn, relative to the tax revenue collected in the year to March 2017.

If Sars were to increase its tax revenue by 5.8% in the year ending March 2018, then R1.211trn will be collected, which would see the agency miss its target by R55bn.

A possible signal of things to come is that May’s tax collections were R74.7bn – just 3.7% up on May last year’s tax revenue of R72bn.

Mamello Matikinca, an FNB economist, said there was no way that Sars’ target of a 10.5% hike in tax collections was going to happen.

This was because growth was weak and inflation was expected to drop, largely because of the record grain harvest that has lowered food prices, which means that nominal GDP growth, and, in turn, tax revenue, would be lower than anticipated.

For the 2017 calendar year, FNB is forecasting the South African economy to grow by just 0.4%, which is notably lower than the 1.3% forecast by National Treasury.

The SA Reserve Bank and the IMF are both forecasting the economy to grow by 1% this year, while the World Bank has a 1.1% projection for growth.

FNB expects inflation to ease to about 5% during the year ending March 2018, Matikinca said.

Government was unlikely to meet its fiscal targets set out in the budget speech given the expected underperformance in tax revenue, she said.

Government needs to find revenue and it was likely to increase debt and try to go for tax increases next year, in particular by hiking VAT and introduce a wealth tax, Matikinca said.

In addition, government could pull back on capital expenditure, especially at state-owned enterprises.

Between the options of raising taxes or increasing debt, Matikinca said government was likely to go for tax hikes as increasing government debt would place the country’s credit rating, which is already rated at junk status, at risk.

On the tax side, with consumers and businesses under pressure, government couldn’t hike taxes too much without suffocating the economy even further, Matikinca said.

Isaac Matshego, a Nedbank economist, said that the taxes that could be hiked next year included corporate tax or VAT.

He said that the ordinary taxpayer was already squeezed by tax hikes, so government could look elsewhere next year.

A hike in corporate tax would hurt local companies as fixed investment – which is key for long-term growth – is already on the decline.

Hiking VAT, while a possibility, was politically sensitive and was unlikely to be announced next year ahead of national elections in 2019, Matshego said.

In the February budget speech, government debt stood at R2.2trn, or 50.7% of GDP, with interest payments on that debt growing rapidly.

Matshego said any shortfall in planned tax collections this year could see government debt climb towards 53% or 54% of GDP.

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