Kathy Gibson reports from PwC’s pre-budget review – As social, political and economic uncertainty preys on South Africans, one thing is certain: there’s a huge revenue deficit that has to be addressed in the budget next week.

“For the last few years we have anticipated tough budgets – and this year, we expect that again,” says Lullu Krugel, chief economist for PwC Africa. “But we do believe there is reason for optimism and some improvements that we have already started to see.”

For instance, unemployment figures, released yesterday, are marginally up; the IMF and World Bank have revised South Africa’s growth outlook up, and we are seeing some reinvestment moves from global organisations.

In the fiscal environment, however, things are still tough, she says. The fiscal deficit for 2017/18 will be about R250-billion- or 5% of GDP, Krugel points out.

Fiscal discipline is therefore going to be vital, she adds.

Although there will be increased collections from sugar tax and medical aid credits, this will still leave significant shortfalls, Krugel says.

Meanwhile state-owned enterprises (SOEs) face financial difficulties and possible rating downgrades, which will increase financial deficits. Krugel says new funding proposals will be needed for SOEs in the future.

The nuclear power plan appears to be off the table, with Cyril Ramaphosa on record saying the country cannot afford it, and doesn’t need it.

About R12,3-billion will have to be found for university funding, and this has to feature in the budget next week. Krugel says the initiative, which will have to funded over the next five years, will need significant planning.

With all of these considerations, government debt levels will inevitably increase.

Kyle Mandy, head of tax policy at PwC Southern Africa, points out that tax revenues have declined, driven mainly by personal income tax, VAT, customs duties and company income tax.

“You do get the sense that things are slowly turning around, though,” he adds. “Things are not going to get worse. At the very least we expect that a downwardly revised forecast will be met.”

A R256-billion shortfall is still likely, although this might improve slightly in the final outcome.

In terms of revenue collection, the forecast for the coming year has been revised downwards by R69,3-billion. There will, however, be  a positive knock-on from higher growth as tax revenues may increase in line with this.

“However, there are some serious fiscal challenges,” Mandy adds. The Minister has already indicated that we can expect tax increases.

South Africa’s tax burden is still about 28% to 29% of GDP, Mandy points out.

The high reliance on personal and corporate income tax for tax revenues, and a relatively low reliance on VAT, makes South Africa quite vulnerable.

“Because we are highly reliant on corporate taxes, in tough economic times it is the one that hurts the most,” Mandy point out. “It’s not a tax you want to be over-reliant on because it is prone to volatility.”

The personal tax burden is also high, at 10% of GDP. In the South African context, this borne by a small portion of the population, with about 25,6% of taxpayers funding 80% of the income tax.

“So you can see how the burden of personal tax has shifted on to a much narrower tax base, and that is of concern,” Mandy says.

PwC predicts that the upcoming budget will be largely business as usual for companies.

It expects there will be no change in the corporate tax rate of 28%; no change in the capital gains tax, and no change in the dividends tax rate.

Mandy does, however, expect continued reforms to broaden the tax base and close loopholes. “This has already been happening, and we expect to hear about further developments in terms of incentives to broaden the tax base.”

For individuals, the picture is not so rosy.

“For the last few years, it has been individuals who have borne the brunt. We are now sitting at a record tax burden of 10% of GDP,” Mandy says.

PwC doesn’t expect to see any increase in personal income tax rates per se. “We don’t think, in the current environment, there is room to increase the personal tax burden.”

Mandy expects some fiscal drag to take place, though, with tax tables not changing to account for inflation – and this could result in R5-billion to R8-billion rand in additional tax revenue.

In addition, there could be a freeze on medical tax credits. In the longer-term medical tax credits would go to fund the NHI, but PwC doesn’t expect this to happen just yet. By freezing them, however, their value will erode over time.

There is also a possibility that capital gains tax might be increased to 50%, from the current 40%. This could raise another R2-billion in tax revenue.

“Capital gains tax is a tax on the wealthy, and could be an area where we see some play happening.”

Some reforms are possibly on the cards, including reforms to the taxation of trusts, and estate duties.

“Overall, if you are a low- or middle-income tax payer, we don’t think you will see much in the way of damage from the budget. If you are wealthy taxpayer or high-income earner, you will be affected.”

Indirect taxes will probably be increased too, Mandy says.

“The bulk of the shortfall can’t come from individual tax payers, so it has to come from indirect taxes.”

This means we will probably see an increase in the VAT rate to 15%, which could raise about R32-billion.

“To make this palatable, we will have to give relief to lower-income taxpayers, and that is being done in the individual tax rates.

Social spending will also have to increase as a result of VAT increase, to compensate grant recipients, and so part of the VAT revenue will be given back.

PwC believes there will also be an above-inflation increase in the fuel levy,

Other revenue sources could be an inflation-linked increase in the RAF levy, the sugar tax that will be introduced from 1 April, and inflationary increases in the excise duties on alcohol and tobacco.