Enoch Godongwana, South Africa’s Minister of Finance will deliver the Budget Speech later this week. Picture: Phando Jikelo/ Independent Newspapers.
PwC South Africa believes Finance Minister Enoch Godongwana will announce in the Budget tomorrow that National Treasury will go ahead with a planned increase in taxes to raise R15 billion more revenue for the 2024/2025 fiscal year.
“South Africa’s fiscal space will be constrained in 2024/2025 due to weak revenues and rising debt-servicing costs,” said PwC South Africa chief economist Lullu Krugel.
The finance minister has acknowledged in recent months that increasing taxes in the current economic environment will be difficult.
“By our estimates, to raise an additional R15bn in tax revenues would require increasing the personal income tax (PIT) rates by 0.5 percentage points across all tax bands, or one percentage point on those earning more than R500 000 a year.
“Alternatively, National Treasury could look at increasing the VAT rate by 0.5 percentage points to 15.5%,” Kyle Mandy, PwC South Africa tax policy leader, said in a statement.
“The MTBPS 2023 indicated the need to increase taxes to raise an additional R15bn in revenue in 2024/2025. Given that tax revenues this year are expected to be broadly in line with what was forecast in MTBPS 2023, we expect National Treasury will proceed with tax increases to raise this amount. The key question is what form the tax increases will take,” said Mandy.
“Increasing either of these options would draw the ire of hard-working South Africans.”
PwC’s expectations for revenues to match the Medium Term Budget Policy Statement (MTBPS) 2023 forecasts reflected a balance between the positive impact of strong job growth on taxes, and the negative impact of lower imports.
PIT collections had been performing better than anticipated on the back of higher-than-expected job creation in 2023.
The MTBPS in November 2023 had made downward revisions to National Treasury’s expectations for tax revenue in 2023/2024.
“Our projections, based on data from the first nine months of the 2023/2024 fiscal year, indicate total revenue collections will be broadly in line with the revised estimates in MTBPS 2023.
“It is understood that National Treasury was hoping that revenue collections will exceed the MTBPS 2023 forecast; that the revenue outlook for the medium term improves alongside this; and that tax increases would not be necessary in 2024/2025,” PWC said.
Total employment increased by 6.2% year-on-year in the third quarter of 2023, while basic salary/wages paid to employees in the formal non-agricultural sector increased by 7.2% year-on-year.
In turn, customs duties and import VAT had been pressured by a drop in renewable energy investment and challenges to logistics processes at local ports. Imports declined by 9% in December 2023.
“We estimate that the 2023/2024 fiscal year will see a budget deficit equal to 5.1% of GDP,” PWC said.
Looking ahead at the 2024/2025 fiscal year, the MTBPS 2023 had pencilled in a deficit equal to 4.6% of GDP, while PwC projected a figure equal to 4.9% of GDP.
“Our number is larger due to a more subdued outlook on economic growth; nominal GDP growth is a significant driver of tax revenue growth.”
For context, a budget deficit of 3.0% of GDP is deemed sustainable, with anything larger than this over a long period resulting in – as South Africa is currently experiencing – acceleration of debt-servicing costs eating into the fiscal spending envelope.
“Elevated debt, tight financial conditions and tepid economic growth is putting pressure on fiscal sustainability while increasing vulnerability to external financial shocks. The fiscal situation is also detracting from other government work as policymakers across many countries face trade-offs between maintaining fiscal stability and other priorities,” PWC said in the report.
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