Another blow for South Africa’s budget 

South Africa’s budget deficit is set to widen further as mining production fell 3.6% in July compared to a year ago, threatening tax revenue and economic growth. 

Stats SA released data showing the steepest contraction in mining activity since February, with significant declines for diamonds, nickel, and platinum group metals (PGMs). 

This is the third consecutive month of decline in mining output, the most significant contraction since January 2022.

The decline in mining output is driven by several factors, including load-shedding, logistics constraints, moderating external demand, and lower commodity prices. 

Load-shedding has disrupted production at some mines, while logistics constraints have made it challenging to transport minerals to market. 

Moderating external demand is due to the slowdown in growth in China and Europe, major markets for South African commodities. 

Lower commodity prices have weighed on earnings and the mining sector’s contribution to government tax revenue collection.

Looking ahead, the outlook for the mining sector remains challenging. Load-shedding is expected to continue, and logistics constraints are likely to persist. 

Additionally, growth in China and Europe is expected to remain weak, which will weigh on commodity demand. As a result, mining output is likely to remain under pressure in the coming months.

The poor performance of South Africa’s mining sector will hurt the third-quarter GDP data as the sector contributes nearly 10% of the country’s GDP. 

Crucially, the sector’s declining output will greatly affect the revenue from tax collections. 

In the past few years, as commodity prices have been rising, tax revenue from the sector gave the government the fiscal space to increase spending on social services and improve the country’s financial health. 

However, with commodity prices softening and mining companies struggling to export their minerals due to the collapse of Transnet, the country is fast coming under significant financial pressure. 

South African Revenue Service (SARS) deputy commissioner Johnstone Makhubu told the 10th Tax Indaba that tax collections fell R22 billion short of the Finance Minister’s February budget estimates for the first five months of the 2024 financial year.

This is predominantly due to a decline in corporate income taxes and a sharp increase in VAT refunds. 

Makhubu said South Africa’s electricity crisis, lack of demand for manufactured goods, erratic foreign policy and overregulation have exacerbated the country’s economic activity decline, translating into a concerning decrease in revenue collection. 

In particular, the mining sector is contributing far less than the previous year as commodity prices have declined, Transnet’s collapse has prevented the export of minerals, and load-shedding has disrupted their operations. 

Makhubu said SARS expects tax revenue to grow at 2.6% year-on-year, substantially below the 6% expected in the February budget. 

The National Treasury is under increasing pressure to take action to address South Africa’s rapidly deteriorating public finances. 

Makhubu told Business Day that SARS closely monitors collections from the mining and manufacturing sectors and VAT refunds.