Kathy Gibson is at PwC’s pre-budget review – There’s little to cheer about as we contemplate the upcoming budget, which promises no relief for either companies or individuals. However, there is an opportunity for government to inject policy certainty in the economy in the upcoming State of the Nation Address (Sona) and budget presentation.
“This is probably the toughest budget since 1994,” says Lullu Krugel, chief economist at PwC. “There is a lot riding on this.”
The levels of uncertainty in the global economy are the biggest concern when trying to find a way forward for the South African economy.
The novel coronavirus and the China-US trade war, together with a global slowdown, are all elements compounding uncertainty, says Krugel.
Local business confidence is at a 20-year low, according to various indexes.
“If we want to rebuild confidence, we need to see some policy certainty and clear directions for the economy,” she says.
PwC surveys find that South Africa keeps scoring own goals by underperforming in key areas investors care about, particularly quality of governance, political stability and property rights.
Low economic growth is a concern, exacerbated by volatility in the country’s growth trends, she adds.
The South African Reserve Bank (SARB) doesn’t expect gross domestic product (GDP) to see the 2% growth needed to catch up with population growth until 2021, with the International Monetary Fund (IMF) and World Bank even less optimistic.
Any growth will have to come from the private sector, Krugel says, and will most likely be based on export growth.
Key challenges are load shedding, increased trade barriers and declining international trade, the coronavirus, weak business and consumer confidence, lingering political uncertainty and social issues.
The fiscal deficit was 5,9% at the Medium-term Budget last year, but could be as much as 6,3% now.
Because of weak employment growth, only 20% of South African adults contribute to personal income tax – and this is the biggest source of tax revenue.
The 2020 fiscal year is probably going to come in with revenues between R4,5-billion and R12-billion less than the downward revision of R52,5-billion announced in the mini-budget.
Kyle Mandy, head of tax policy at PwC, points out that revenue collection has deteriorated over the last few months.
The main culprit is VAT collection, he says, with corporate income tax roughly in line with the MTBPS and personal income tax slightly better than the last estimate.
“We will see a significant further reduction in tax revenues for next year as well,” Mandy adds.
In the 2019 budget, an additional R10-billion in taxes was announced and this will carry through in 2020.
This leaves another R50-billion that needs to be cut and there is still uncertainty about where this will come from. Ideally, it would be from expenditure cuts, Mandy says, and it is expected that at least some action will be taken in that respect, but it’s not likely to account for more than half of the shortfall.
However, PwC expects that at least R25-billion will be found through a combination of VAT and personal income tax in the form of fiscal drag.
“The personal income tax level on its own won’t come close to the revenue required. There is likely no choice but to find the additional revenue through VAT.”
Mandy points out that South Africa is back to record tax:GDP ratios, at 26%. This excludes provincial, local and social security taxes, which would bring the number to 29%. This is expected to increase further in the medium-term.
PwC doesn’t believe there will be an increase in corporate tax. The rate, at 28%, is already higher than our main trading partners and if it goes higher it will make investment less attractive.
In addition, it doesn’t expect any change in the capital gains tax, already 80% of the corporate tax rate. The dividends tax was increased recently to 20% and no further increases are expected there.
However, PwC believes the country continue to implement reforms to broaden the tax base and close loopholes.
When it comes to income tax, this is coming from a narrowing tax base shouldering a record tax burden.
PwC doesn’t expect there to be any increases in tax rates, but foresees limited fiscal drag with relief favouring lower- and middle-income earners. There is also unlikely to be an increase in medical tax credits, while the capital gains tax inclusion rate could rise from 45% to 50%.
VAT will likely have to increase, Mandy says. Whether this is 0,5% or 1% is still to be seen, but PwC believes some kind of increase is vital.
Increased efficiency in SARS collections may well have a significant impact on these numbers, Mandy adds.
Inflationary increases will likely be seen in the general fuel levy, sugar tax and excise duties on tobacco and alcohol, while the Road Accident Fund levy could see a substantial increase of at least 30 cents per litre.
Mandy says there has been talk of a luxury VAT rate, but this is not expected to come to light. The list of goods subject to ad valorem duties may be expanded instead.