Biggest threat to South Africa’s budget

South Africa’s high tax-to-GDP ratio – and the resultant lack of economic growth – is the “single biggest threat” to South Africa’s budget.

This is the view of Efficient Group chief economist Dawie Roodt, who added that this ratio could be what results in zero or even negative economic growth in 2023.

“I can’t see the economy supporting this type of tax contribution to the fiscus over the next couple of years,” he said in a post-budget analysis for the Cape Chamber of Commerce and Industry.

“As far as I’m concerned, that is the single biggest threat to the budget.”

The tax-to-GDP ratio is a measure of a country’s tax revenue in relation to the size of its economy. 

A high tax-to-GDP ratio could indicate that government is not efficiently allocating tax revenue to develop infrastructure to facilitate economic growth. 

Developed countries often have higher tax-to-GDP ratios, as these countries have more tax-paying citizens that can contribute to the state’s coffers.

These higher tax revenues can be used to better the country’s infrastructure and public services, which, in turn, bodes well for the country’s people and economy.

The World Bank said tax revenues above 15% of a country’s GDP are key to economic growth and, ultimately, poverty reduction.

In 2022, South Africa’s tax-to-GDP ratio was 24.9%. 

In comparison, the three largest countries by GDP – the US, China and Japan – have tax-to-GDP ratios of 18.7%, 12.6%, and 13.5%, respectively.

South Africa’s GDP and economic growth do not align with its high tax-to-GDP ratio. 

It is because South Africa has a very small tax base. Only 7.4 million people in the country pay personal income tax (PIT) and of those, only 1.1% pay 30% of the total PIT. Only 770 companies pay over 60% of South Africa’s corporate tax.

Therefore, South Africa’s taxpayers are overburdened, and their expenditure is not in line with their tax contributions.

“Treasury can budget for the spending, but it cannot spend it for the people,” explained Deborah Tickle, adjunct associate professor at the University of Cape Town, in the same post-budget analysis.

This means the economy does not grow in line with the tax-to-GDP ratio, as expected.

Economic growth

The solution to this problem does not lie in raising taxes further. “The problem isn’t the amount we collect. The problem is what we spend and how we spend it,” said Tickle. 

Inefficient and increasing government expenditure also poses a threat to economic growth. 

South Africa’s budget expenditure was R2.2 trillion in 2022, which amounts to 33.5% of GDP.

Roodt warned that should this continue, and in light of South Africa’s electricity crisis, the country’s economic growth could dip below zero as soon as this year.

South Africa’s economy is already showing signs of deterioration, as GDP contracted more than expected in the fourth quarter of 2022, shrinking by 1.3%.

The South African Reserve Bank (SARB) and National Treasury’s GDP projections are at odds.

Treasury expects the economy to grow by 0.9% in 2023, while SARB only projects 0.3% growth.

Finance minister Enoch Godongwana attributed this disparity to the difference in their models’ assumed severity of load-shedding.

Regardless of projections, if the government does not make a concerted effort to stimulate growth, there is no prospect for a larger tax base.