Figures released by the Treasury outlining the government’s spending and revenue collections for December underscore the uphill climb the state faces to meet its budget targets, as the economy sputters and government spending continues apace.
Revenue collections, particularly company income tax and VAT, were slower during December, a month that typically sees a spike in corporate tax collections, according to economists. At the same time, spending by the state into December was up more than 14% year on year.
The numbers do not bode well for finance minister Tito Mboweni and his team at the Treasury as they prepare the budget for delivery later in February. After a dismal medium-term budget policy statement (MTBPS) in October, which included a number of revisions to reflect higher deficits and debt levels, this has upped the stakes for the speech Mboweni must deliver on February 26.
Credit ratings agencies — notably Moody’s Investors Service, the last agency that rates SA at investment grade — as well as investors, will be looking for concrete signs that the government can deliver on promises to cut spending and wean struggling state-owned enterprises (SOEs) off the fiscus.
The main budget balance recorded a deficit of R2.2bn in December, according to the Treasury’s data. In addition, while the December seasonal surge in corporate income tax (CIT) receipts usually delivers a “sizeable budget surplus” in December, senior Absa economists Peter Worthington and Miyelani Maluleke said in a note that this December CIT receipts fell 0.7% year on year, “a big blow to SA’s challenged fiscus”.
The contraction in CIT receipts reflects the extremely difficult trading conditions experienced by SA firms, especially in the financial sector, which accounts for a big portion of total CIT collections, they said.
The decline in corporate revenue will hurt the fiscus and it is “very difficult to make that up in the next couple of months”, said Stanlib chief economist Kevin Lings. “When you look at the weakness, to me it’s clear that it reflects the broader economic performance,” he said.
Collections of VAT, meanwhile, were slower despite a decline in VAT refunds, said Worthington and Maluleke.
In the 2018 medium-term budget, as well as the 2019 February budget, the government had to revise down its forecasts for tax revenue due to the need to pay out more VAT refunds than expected. This was thanks to the governance fallout at the SA Revenue Service (Sars) under former commissioner Tom Moyane, damaging its capacity and resulting in a backlog of VAT refunds.
“The bulk of the catch-up in VAT refunds now does appear to have been concluded, but the slow pace of growth in domestic collections is a little surprising, given reports of Big Black Friday sales,” they said.
Overall in the fiscal year to date gross tax collections have risen by just 4.6% year on year, said Worthington and Maluleke, well below a required collection rate of 6.4% needed to meet revenue targets set out in the October medium-term budget.
On the spending front total expenditure rose to R162.5bn in December 2019, about 14.19% higher than the R142.3bn in December 2018.
The expenditure side of the budget has been damaged by the demands of SOEs, said Lings. But it also suggested that the government was not making headway in keeping costs under control, he noted. “We don’t appear to be able to make a meaningful inroad to control broader expenditure in any meaningful way,” said Lings.
Absa is forecasting that the budget deficit will come in at 6.9% of GDP for the 2019/2020 fiscal year, well above the Treasury’s expectations of a deficit of 6.2%. It has also argued that in the face of poor growth and continued spending pressure, the state may have little choice to hike VAT by one percentage point to 16%.
But Lings warned that a VAT hike under current economic circumstances could be “dangerous and potentially counterproductive”. It would penalise consumers when households are already under pressure, it may not raise the revenue anticipated and would weaken both consumer and business confidence further, he argued.
Instead the state needed to be looking to reforms to stimulate economic growth, Lings said.
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