The South African government has a revenue gap of R30 billion and will likely turn to the South African Revenue Service (SARS) to increase tax collections to plug the deficit.
This is feedback from financial services firm PwC, which said that the National Treasury has run out of other options to fill the country’s revenue gap.
PwC expects Finance Minister Enoch Godongwana to turn to SARS Commissioner Edward Kieswetter to bolster tax collections and make up the shortfall.
“The Finance Minister has indicated that spending cuts and increased borrowing – not higher taxes – can be expected.”
“However, PwC also anticipates that the Minister will place greater responsibility on SARS to improve compliance levels to bolster fiscal income over the medium term.”
Government expenditure has continued to outstrip revenue collection, substantially widening its budget deficit.
The Treasury said total revenue growth was 8.7% year-on-year in August, while total expenditure grew at a stronger pace of 9.2%.
As such, South Africa’s budget deficit widened to R238.4 billion in the first five months of the 2023/24 fiscal year, or R254.4 billion, including Eskom debt relief.
This is much bigger than the deficit of R160.7 billion in the same period in 2022/23.
PwC expects the budget deficit to grow to 5.5% of GDP this year, compared to a Budget 2023 projection of 4.0%, forcing Godongwana to make tough decisions to plug the deficit.
The National Treasury has three main ways to boost revenue – cut spending, borrow more money or hike taxes. Each of these options has its drawbacks and risks.
Cutting spending would take time to deliver results and is politically unpopular. Treasury has already urged departments to rein in spending and spoken up about hiring freezes and potentially cutting entire programmes.
This has been met with stiff resistance from within the ruling ANC and its alliance members.
Borrowing more money is also risky, as global financial conditions are unfavourable, and the government will have to pay near record-high interest rates on any new debt issued.
The government also already has a hefty debt burden, which is growing by roughly R14 billion a week, and its debt servicing costs are the fastest-growing budget item.
Hiking taxes would shift the burden of closing the gap to the broader population. However, personal and corporate income tax groups are already heavily taxed, and the Treasury is unlikely to draw more from those groups.
However, there is room for a value-added tax (VAT) hike, as South Africa’s VAT rate of 15% is still below the global average of 19%. But, this is not a popular move politically, considering there is a national election next year.
SARS is the answer
According to PwC, SARS can potentially plug the country’s revenue gap by reducing the tax gap, which is the difference between taxes legally owed and taxes collected.
PwC estimates that the tax gap is around R300 billion and that if SARS can reduce it by just 10%, it would generate an additional R30 billion in revenue, which would be sufficient to fill the revenue gap in the budget.
SARS has been ramping up its efforts to draw more tax revenues from non-compliant taxpayers, particularly high-net-worth individuals and trusts.
In its most recent report, SARS said it collected over R16 billion in taxes owed by big companies, almost R14 billion owed through audit investigations, and close to R3 billion from its work with high-net-worth individuals.
PwC believes that placing greater responsibility and pressure on SARS will also require the government to give it additional resources to fulfil this role.