Tax warning from Finance Minister

Finance Minister Enoch Godongwana hinted about tax increases to fund the government’s growing expense bill during News24’s 2023 On The Record Summit.

Godongwana said South Africa’s economic growth and tax revenue have been hampered by the energy crisis, with record load-shedding levels and logistics problems.

Therefore, the government’s revenue for this financial year is projected to be significantly lower than initial estimates.  

The National Treasury revealed that the budget moved to a deficit of R143.8 billion for July, the largest since 2004 and wider than the R115.5 billion forecast by economists.

The Bureau for Economic Research said the fiscal balance is being squeezed from the revenue and expenditure sides.

If the current pace of underperformance in tax collections is sustained throughout the year, gross tax revenue will be R82 billion lower than the February projection.

Godongwana said there are three ways to address the revenue shortfall and fiscal deficit.

• Increase taxes, which is challenging and unpopular.
• Borrow more money, which has limitations.
• Budget cuts, which also have limitations on how much you can cut before hurting the system.

“I suspect you may need a combination of these instruments moving forward. You will probably get that on 25 October during the medium-term budget policy statement,” he said.

The Finance Minister said the task of balancing the budget is made more difficult because of the general elections next year.

“During an election, nobody wants to increase taxes, but everybody wants to increase expenditure to buy votes. You can’t have both,” he said.

“I said in February that if some of the things we are funding now become a permanent fixture, we must find a revenue source for them.”

He referred to things like the R350 social relief of distress grant (SRD Grant), which was introduced during the Covid-19 pandemic.

Over the weekend, President Cyril Ramaphosa said the R350 grant laid the foundation for introducing a basic income grant.

He said the successful implementation of the R350 grant has shown that the government can roll out a basic income grant of a similar nature.

Godongwana cautioned against thinking that things that were easily funded during a commodity boom and revenue overruns can continue.

Government running out of money

The National Treasury has proposed drastic steps to rein in spending as the government has run out of money and faces a debt trap.

It includes a freeze on new public service jobs, stopping procurement contracts for all infrastructure projects, and keeping public servant salary increases in check.

However, despite the state continuing to spend far more than it gets in with a growing fiscal deficit, not everyone is keen to reduce spending.

President Cyril Ramaphosa recently said lower spending is “not necessarily” the answer to the country’s fiscal challenges.

“The revenue projections that we had have been lower than what we had anticipated. That immediately tells you that we are going to have headwinds,” Ramaphosa said.

“What should we do? The discussion is ongoing. It is not necessarily cutting spending. It is seeing how best you focus on your key delivery areas.”

“After considering key investment areas, you look at how you recalibrate the other spending, you re-prioritise.”

Without spending cuts or rapid economic growth, South Africa’s debt will continue to grow, and it will continue to spend more on servicing interest on this debt.

It can lead to a debt spiral, ultimately resulting in high inflation levels, further stifling economic growth.

The outcome of this situation can be devastating for a country, which is why many experts are urging the government to cut spending as a matter of urgency.