South African government tax warning

The National Treasury has warned the government that a tax increase or big spending cuts were needed to continue funding the R350 Social Relief of Distress Grant (SRD Grant).

The Sunday Times reported that the Treasury told President Cyril Ramaphosa and his ministers that the government faces unprecedented revenue and spending pressures.

The financial pressure is a result of a challenging economic position because of extensive load-shedding, sticky inflation, and poor growth.

Should the government want to continue funding the SRD Grant, the National Treasury suggested a two percentage point increase in VAT.

The other option is to cut numerous government initiatives, including visible policing, the expanded public works programme, and the mine health and safety inspectorate.

Other initiatives that face the chop include welfare support, environmental protection, and intervention programmes on food security and informal settlement upgrades.

The Sunday Times report followed shortly after Finance Minister Enoch Godongwana hinted about tax increases to fund the government’s growing expense bill.

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 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 (BIG).

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

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