South Africa

Could SA see a tax hike soon?

Finance Minister Enoch Godongwana hinted at a potential tax hike to address South Africa’s mounting expenses, citing various economic hurdles the nation faces.

He stated that these challenges, including energy shortages and rail system woes, have severely hampered economic growth and tax revenue generation.

Godongwana’s remarks at the summit were closely watched, as they shed light on the government’s approach to dealing with South Africa’s current fiscal predicament.

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The minister was speaking at News24’s 2023 On The Record Summit.

He explained that these issues have triggered concerns across the business community, sparking conversations about the nation’s financial future.

Energy crisis and tax revenue impact

The finance minister acknowledged the detrimental effects of South Africa’s energy crisis and the resulting record levels of load shedding and logistical bottlenecks on the nation’s economic landscape.

As a direct consequence, he explained that tax revenues have been significantly stifled, and economic growth has been curtailed.

BusinessTech reported that major businesses, including food producers, retailers, and manufacturers, have reported substantial expenditures aimed at mitigating the impact of power cuts. These expenses have not only impacted their profits but have also reduced their potential contributions to the country’s tax revenue.

Transnet inefficiencies and economic cost

The minister also mentioned that Transnet, the state-owned freight transport and logistics company, has come under scrutiny for its inefficiencies. According to a study conducted by the GAIN Group, these inefficiencies cost the South African economy a staggering R1 billion per day. This alarming figure underscores the potential economic growth that has been lost due to logistical constraints.

Declining corporate tax receipts

With commodity prices on the decline and economic growth slowing due to energy shortages and logistical challenges, recent Treasury data reveals that corporate tax receipts have plummeted by over 20% compared to the previous year. Additionally, an unexpected public sector wage settlement has further driven up government spending.

Budget deficit

As a result of these factors, the minister explained that the government’s revenue for the current financial year is expected to fall significantly short of initial estimates.

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The National Treasury disclosed that the budget deficit for July reached R143.8 billion, surpassing the R115.5 billion forecast by economists. If the current trend of underperforming tax collections persists throughout the year, gross tax revenue could fall short by R82 billion compared to the February projection.

Addressing the fiscal shortfall

Godongwana proposed three strategies to address the revenue gap and fiscal deficit. Firstly, he said that they were considering tax hikes, recognising their difficulty and potential unpopularity but deeming them necessary for fiscal stability.

Secondly, he said that they were contemplating borrowing, though being cautious due to the risk of long-term debt issues from excessive borrowing. Lastly, he said that they were examining budget reductions in government spending, with a cautious approach to prevent harm to vital services and the overall economy.

Balancing act

Godongwana also highlighted the added complexity of managing the budget in the lead-up to the general elections scheduled for the following year. Striking the right balance between fiscal responsibility and addressing public expectations during this critical period is a formidable challenge.