An increase in global demand for commodities, resulting in higher prices, higher economic growth and higher-than-expected tax revenue benefited SA, but is “just a one-time boost.”
Finance Minister Enoch Godongwana announced in his Medium Term Budget Policy Statement (MTBPS) that gross tax revenue is expected to exceed estimates presented in the February budget by R 120.3 billion, of which the tax on corporate income represents R75.5 billion.
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However, he warned that revenue collection remains well below pre-Covid-19 projections. There is still “deep uncertainty” about the durability of the economic recovery, mainly due to renewed volatility in global conditions and the risk of renewed power outages at Eskom, he warned.
The provisional corporate income tax collected in the first six months of the current fiscal year was 44% higher than the equivalent period in 2019/20, mainly driven by the mining and quarrying sector.
Higher personal income tax collection is expected to generate an additional 26.1 billion rand relative to the 2021 budget projections. Personal income tax represents an average of 38.4% of income for the next three years.
Other major tax categories have also grown above 2019/20 levels. This includes:
- A strong recovery in earnings, with both nominal and real average salaries close to 2019 levels for the first quarter of 2021, supporting the collection of personal income tax;
- Higher export prices driving profitability in the mining sector and better manufacturing and finance collections;
- Resilient household consumption in the midst of economic recovery, driven by strong incomes, low borrowing costs and higher social transfers, which strengthened the internal collection of the value added tax (VAT); and
- Better import volumes in the first half of 2021, offset by trade disruptions, leading to lower import tax and customs collection.
Revenues for 2021/22 are now estimated to reach 1.5 trillion rand, compared with 1.4 trillion rand at the time of the 2021 budget in February, Godongwana said in his speech.
Below pre-pandemic expectations
For the next two years, tax revenue is expected to be R70 billion and R59.5 billion higher, respectively. “Revenue collection remains well below pre-pandemic expectations, and in this sense, the updated figures are more rosy to mislead,” Godongwana commented. Compared to the 2020 budget projections, revenue is expected to be R284.7 billion lower than projected through 2022/23.
Economists and tax commentators had expected revenue collection to exceed 150 billion rand for the current year, compared with former finance minister Tito Mboweni’s initial February budget estimate.
However, the unexpected tax revenue will allow the government to offer a tax relief package of close to R50 billion including R37.9 billion in direct tax support and another R11 billion that is earmarked for the South African Association for Special Risks Insurance. (Sasria).
The basic income subsidy will run until March next year and, should it be extended beyond that, funds will be allocated from other programs under the current budget framework, the minister said at a press conference.
The employment tax incentive has been extended from August 1 to November 30 at a cost of R5 billion in lost tax revenue.
The additional tax revenue will also go towards reducing the borrowing requirement. Not containing the public service wage increase (an additional 20 billion rand) will also eat up the windfall from tax revenue.
The National Treasury expects tax revenues to increase to R1.72 trillion, or 24% of GDP, by 2024/25. “The rebound in commodity prices and the resulting benefits from the terms of trade are expected to remain favorable for the remainder of 2021/22, but export commodity prices are expected to decline, with a deterioration associated with the terms of trade in the last years of the forecast, ”said the Treasury.
The government only expects a primary budget surplus, where revenues are higher than expenditures without interest, for 2024/25, which will end the period of fiscal consolidation.
Godongwana regretted that higher economic output has failed to raise investment and employment, due to the structural nature of our poor economic performance. “Businesses continue to be constrained by long-standing obstacles such as electricity shortages, high-cost and inefficient rail transportation, inadequate broadband spectrum, and red tape.”
Progress in implementing reforms, as well as some important steps to boost competition in power supply and ports, remains slow, he admitted.
The government, again, promised to accelerate structural reforms to promote growth, while maintaining ongoing fiscal consolidation to reduce the budget deficit and stabilize debt.