South Africa’s big tax problem

The government is set to collect billions less in corporate income taxes and VAT in the current financial year as consumers spend less amid a rising cost of living. 

While the government’s overall tax collection is expected to be up around 7.1%, this will be driven by squeezing the country’s small base of personal income taxpayers even harder. 

In the short term, this will cover shortfalls in other areas but cannot be sustained in the long run, Nedbank economist Isaac Matshego said. 

Furthermore, while personal income tax collection is expected to grow significantly year-on-year, it is still below the National Treasury’s target of 13.7% growth for the year. 

This represents a growing problem for the government – it is becoming increasingly reliant on taxes collected from South Africa’s 7.4 million personal income taxpayers. 

Matshego explained that a country’s revenue sources should be as broad as possible to minimise the impact of external shocks and a potential downturn in economic activity. 

Therefore, while personal income tax collection has shown strong growth, it is concerning that other major revenue sources are declining year-on-year. 

Corporate income tax collections are around R1 billion below budget in the first five months of the current financial year, a decline of 1.2% compared to the same time last year. 

National Treasury expects collections from companies to grow by 0.4% in the 2024/25 financial year. 

VAT is even more concerning for the government, with Nedbank’s data showing that collections are around R8.5 billion below budget so far. VAT collections have declined by 0.7% year-on-year. 

This is far below the National Treasury’s expectations for the financial year, where it expects VAT collections to grow 7.1%. Matshego said this is overly ambitious, with Nedbank expecting growth of only 5.1%.

Matshego explained that the declines in corporate income tax and VAT are reflective of the immense pressure the South African consumer is under. 

With the cost of living and interest rates rising, disposable income has shrunk substantially, resulting in lower consumer spending. 

This, in turn, impacts VAT collections on sales and, ultimately, corporate profits. 

Matshego expects government revenue to pick up in the final quarter of the tax year, with Nedbank forecasting a 7.8% increase in tax collections. 

This will translate into a R2 billion surplus above what the National Treasury has pencilled in for tax collections in the current financial year. 

Matshego also said this reflects a much improved SARS, which has undergone a tremendous turnaround under Commissioner Edward Kieswetter. 

The institution was one of the hardest hit by state capture, effectively being gutted and losing its enforcement capability. 

This has steadily been rebuilt under Kieswetter, with SARS regaining its reputation as one of the most capable government institutions. 

Crucially, it has resulted in much-improved compliance rates and increased tax collection – without tax increases. 

However, others have warned that the expected pick up in tax collections towards the end of the tax year will not be enough to make up for disappointing revenue numbers in the first five months.

Head of macroeconomic research at Standard Bank, Dr Elna Moolman, said the bank expects the government’s fiscal deficit to be marginally bigger than the Treasury’s expectation in the February Budget.

This is down to poor revenue collection so far in the 2024/25 financial year, which should recover towards the end of the year as economic activity picks up.

If the government’s fiscal forecasts remain broadly unchanged, with no material deterioration from the projections in the February budget, it should ease investors’ and the rating agencies’ concerns about the country’s fiscal sustainability, Moolman said.

While the Treasury has previously alluded to a possible fiscal anchor (a quantitative and binding guide to institutionalise fiscal discipline), it might be too soon to expect a formal announcement in this regard in the MTBPS.

Matshego said there is simply no room for the National Treasury to increase taxes as they will be counterproductive and result in less revenue in a weak economy. 

This can be seen in the trend of tax collection over the past decade, with revenue declining despite numerous tax increases. 

Furthermore, any increases will put even more pressure on South Africa’s relatively small tax base, making government revenue less stable and predictable. 

The only sustainable way for the government to increase the revenue it collects is to ensure the economy grows at a much faster rate than it has for the past decade.