Government’s hidden R58 billion tax

The government has been able to add R58 billion to its tax revenue in the medium term, not by raising taxes but simply by not adjusting the country’s tax brackets.

This was revealed on 702’s The Money Show, by the South African Institute of Chartered Accountants’ Project Director for Tax Advocacy, Lesedi Seforo.

Seforo’s comments come after Finance Minister Enoch Godongwana presented the Medium-Term Budget Policy Statement (MTBPS) at the end of October.

In his statement, the minister revealed that tax collection for 2024/25 is expected to be R22.3 billion lower than what the Treasury estimated in its February Budget.

He added that, over the next two years, the main budget revenue estimate has also been lowered by R31.2 billion.

“In the absence of faster growth and in the face of external risks, tax revenue will remain under pressure, forcing us to make difficult decisions on where to spend,” he said.

“Lower revenue also means that we cannot, within the envelope, accommodate all of the demands on the fiscus.”

In an interview with SABC News following the MTBPS, the South African Revenue Service Commissioner Edward Kieswetter explained why tax revenue came in below expectations.

Kieswetter highlighted three key assumptions that led to lower tax revenue this year.

First, SARS overestimated personal income tax revenue, expecting an 8.4% growth in the wage bill and 32,000 new jobs. 

Instead, the wage bill grew only 5.4%, and job growth lagged due to high retrenchments and emigration.

Second, SARS expected higher fuel levy income, which would have been driven by an increased rate, higher consumption or higher prices.

However, the National Treasury did not increase the levy rate, and fuel consumption dropped by 11%.

This is partly because Eskom reduced its diesel usage, and many South Africans switched to solar power. This led to an R8.4 billion revenue shortfall.

Thirdly, SARS anticipated a 1.9% rise in imports, but imports declined by 3.7%, reducing customs duties and VAT from imports.

Hidden tax

This decreased tax revenue is a significant problem for the government, as it means the state cannot afford to implement many of the strategies that would lead to better economic growth.

In the MTBPS, Godongwana said difficult trade-offs in all spheres of government will have to be made due to the lower revenue.

However, he said that by sticking to its debt-reducing strategy and confronting these trade-offs, the government can create the necessary conditions for a fast-growing economy that facilitates employment. 

In the February Budget, the National Treasury did not make any major changes to South Africa’s tax rates, to many taxpayers’ relief.

However, the government faced a significant deficit last year, which meant it had to look for money somewhere else when setting up the 2024 Budget.

Deteriorating government finances and an overburdened tax base meant the government turned to “bracket creep” to raise revenue – something that saw South Africans pay up to 21% more in tax than a decade ago.

Bracket creep happens when tax tables and deduction limits are not adjusted for inflation. This makes taxpayers pay more, resulting in greater revenue without hiking rates.

Government finances continued to deteriorate in the 2023/24 financial year, with tax collections growing by only 2.6% – less than the inflation rate. 

Lower-than-expected tax revenue and government overspending saw the National Treasury report a R347 billion deficit for 2023/24.

As a result, the Treasury aims to raise an additional R15 billion in tax in the 2024/25 tax year.

Coronation’s head of personal investments, Pieter Koekemoer, said this will primarily be done through bracket creep.

Koekemoer explained that, as tax brackets were not adjusted for inflation, effective tax rates have increased across the income spectrum.

Koekemoer said that, up until the 2014/15 Budget, relatively healthy economic performance resulted in several budgets that brought real relief for taxpayers. 

“However, the effect of the state capture years and significant underinvestment in our infrastructure over many years resulted in much weaker economic performance since,” he said. 

Material tax hikes were announced in five consecutive budgets to alleviate this pressure on the government’s fiscal balance since 2015/16. 

This was then followed by four budgets without major changes but also without adequate relief for the impact of inflation. 

Cumulatively, effective tax rates have increased significantly over the past decade, Koekemoer said.

Seforo said bracket creep is the easiest way for the government to increase taxes without anyone noticing.

“You’re looking at an extra R58 billion in tax revenue over the medium term just from not adjusting those tax brackets,” he said in reference to 2024’s Budget.