South Africa VS Coronavirus: Public finances looking prickly

This is part 3 of a series.

The gloomy expectation has been set in the context of an economy that is predicted to contract 7% in the best-case scenario and 16% if the worst comes to bear.

In its June 2020 Global Economic Prospects publication, the World Bank describes this as the “deepest contraction in a century.”

READ MORE Coronavirus: South Africa expects economy to tank as it grapples with pandemic

It is against this backdrop that finance minister Tito Mboweni will table an adjusted budget on 24 June.

Analysts are in agreement that Mboweni does not have room to manoeuvre and raise taxes to stabilise public finances. Companies and individuals alike are suffering under the immense difficulties arising from the COVID-19 crisis.

The global outbreak of the coronavirus has also disrupted trade flow among states.

READ MORE South Africa: Trade with the US likely to get foggy

“Expectations for company bankruptcies are high. Corporate income tax is going to be negatively impacted,” warns Isaah Mhlanga, Alexander Forbes’ executive chief economist.

Consumer confidence is at an all-time low, with a tidal wave of retrenchments looming and those South Africans in employment are facing salary cuts and an uncertain future.

This will have an adverse bearing on spending, which will place pressure on value-added tax (VAT) collections. “Low spending translates into lower VAT collections for the South African Revenue Service.”

In addition to uncertainty around unemployment, consumers have “concerns about their safety as far as COVID-19 is concerned,” says Mhlanga.

Taxing times

All the major tax revenues are going to be impacted: corporate income tax, VAT collections, personal income tax and import duties.

Given the number of people who are going to lose jobs as companies retrench, personal income tax is going to be affected. But estimates vary to what extent. “There is huge uncertainty as far as tax collections are concerned,” says Mhlanga.

In the global environment, economic contractions experienced by South Africa’s trading partners mean exports are also going to decline. That means diminished import duties collections from trading activities.

“Expectations vary from somewhere between R150bn to R250bn in tax under-collections for the year,” says Mhlanga.

French connection

Delia Ndlovu, MD, and Billy Joubert, associate director, at Deloitte Africa’s tax and legal unit, agree there is not much room for the finance minister to hike taxes.

“To compound matters further, the government is currently foregoing valuable sources of income in the form of excise duties, customs duties and VAT because of the ban on the sale of tobacco products and, until recently, alcohol,” state Ndlovu and Joubert.

Ndlovu and Joubert propose Mboweni introduce “a digital tax similar to the 3% France imposed on Amazon, Netflix and Facebook” to boost revenue.

READ MORE If it’s sold, shared or created online, Kenya wants it taxed

However, France reneged on this form and tax, following nudging from the US government.

Furthermore, “the Organisation for Economic Co-operation and Development … [is] design[ing] a unified digital tax approach to be adopted globally to avoid countries unilaterally imposing [a] digital tax.”

There goes that idea.

• “In our view, tax increases are unlikely. But if this does happen, it could be on a once-off basis, for example, a levy on wealthy individuals,” say Ndlovu and Joubert.
• However, “it is doubtful whether the government could introduce this as a new tax, as it is probably too difficult to design and implement a new tax in a short timeframe. An easier option may be to have a once-off COVID-19 surcharge levy as a new income tax band for high net worth individuals,” say Ndlovu and Joubert.

Deepening deficit

The combination of declining tax revenues and a deep economic contraction mean a higher fiscal deficit. In the February budget, it was 6.8%. Now, it is anticipated to reach 14%.

“That is a significant dent on the fiscus and implies that we would have to increase our debt. Our debt-to-GDP ratio is now expected to increase to 90% of GDP over the next three to four years,” Mhlanga told The Africa Report on Friday.

Room to reform

A reform agenda would create conditions conducive to economic growth. Such growth would enable the government to service debt once COVID-19 passes. Furthermore, a consolidation path would help ensure the debt is brought down to manageable levels post-COVID-19.

“We do not expect any consolidation because we have to deal with the impact of COVID-19, and for that we need to spend more – not cut spending. We would only come with a consolidation path after COVID-19 has been dealt with,” explains Mhlanga.

In terms of state-owned entities (SOEs), the government will have to be selective about which ones it supports, “taking into account the strategic objectives and what sectors are going to be crucial in aiding recovery.”

Eskom, for example, supplies more than 90% of South Africa’s power. This makes it an integral part of a post-coronavirus economic recovery.

The Infrastructure Investment Office, a unit operating with the Presidency, has identified manufacturing, agriculture, energy and transport as sectors which will drive a recovery.

Reform, of the economy in general and SOEs in particular, is unavoidable.

• “The reform process is ongoing. As far as tightening the belt goes, what is likely to be the case is a reprioritisation of spending from sectors that are not necessarily job boosting or that are not critical for the economy to grow.”
• “We know there is some R130bn that has already been reprioritised as part of the funding for this adjusted budget. That, in part, is taking money away from departments that are not critical – at least in the current moment – to where it is required the most. But I think it’s slow. It could be done quicker,” says Mhlanga.

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Click here for part 2. 

Click here for part 4. 

Click here for part 5

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