The SA Revenue Service (Sars) and the National Treasury released the country’s tax statistics last week, and while fiscal year 2021/2022 saw an annual increase of R314bn, slowing economic growth and the high rate of joblessness will hit company bottom lines and personal income tax collections.
This comes as the National Treasury faces more pressure from unions to increase public-sector wages by higher than the budgeted amount, a move sure to blow the fiscus’s expenditure trajectory.
As it stands, compensation to state employees is set to increase from R690.4bn in 2022/2023 to R760.6bn in 2025/2026, growing at an average annual rate of 3.3%, mainly due to the carry-through costs of the public-service wage increase implemented in 2022/2023.
Unlike previous economic shocks, such as the 2008/2009 global financial crisis, when it took several years before tax revenue collections recovered to pre‐crisis levels as a proportion of income and consumption, the post-Covid economy saw recovery in tax revenue noticeable across all tax types.
This was especially true for corporate income tax due to the escalation in commodity prices, as well as domestic taxes on goods and services, which were most affected by lockdown measures during the pandemic.
Sars data shows that on March 31 last year, 22.3% of the 3.5-million registered companies were assessed and 50% of the 941,406 registered VAT vendors were active.
The data also shows that personal income tax was the largest contributor to tax revenue at 35.5%. Sars said the number of individuals registered for income tax increased to 24.8-million in 2021/2022 from 23.8-million in 2019/2020, representing a year-on-year growth of 4.1%.
Tax ratios also improved. The tax-to-GDP ratio is the country’s tax revenue compared to its GDP, which measures its overall tax burden.
Data shows that the tax-to-GDP ratio increased from 23.8% in 2019/2020 to 24.9% in 2021/2022.
There is also growing attention on increasing the efficiency of tax administrations to reduce costs while providing better services to citizens, Sars said.
The cost ratio of revenue collection decreased from 0.89% in 2017/2018 to 0.72% in 2021/2022.
The mining sector also performed well, mainly driven by strong commodity prices from the platinum group metals (PGM) baskets, particularly the price of platinum. This was despite the pullback from the US dollar and iron ore prices since September 2021.
The manufacturing sector also did well, mainly driven by manufacturing output. Production recovered from a contraction during most of the 2021/2022 financial year that was caused by load-shedding and the resurgence of Covid-19 infections.
The numbers were also boosted by the Absa purchasing managers’ index (PMI), which edged up for the second consecutive month to 58.6 index points in February last year after rising to 57.1 in January 2022.
However, this may not be the case ahead.
Economists have warned GDP is likely to contract in the fourth quarter of 2022. Low economic growth is bad for business confidence, and will have a negative impact on public finances as companies choose not to invest in capital projects or their bottom lines are battered.
In a research paper released on Monday, Nedbank said it expects real GDP to contract by 0.4% quarter on quarter in the fourth quarter. The bank said it forecasts a contraction in the first quarter of 2023, as well.
Nedbank economist Crystal Huntley said the mining and manufacturing sectors have for the past decade been held hostage by these structural constraints.
“This is evident in the long-term performance of these two industries. In the 10 years up to the end of 2019, mining production grew by an average rate of only 0.4% per year, while manufacturing output declined by an average rate of 0.4% per annum,” she said.
Huntley said despite the government’s plans to gradually shift spending away from consumption to investment in infrastructure, it would take several years to lift these constraints even if SA were to ramp up investment in energy generation and logistical infrastructure.
Not only will these domestic structural challenges impact future tax revenues, the global business cycle will be less supportive of mining and manufacturing.
The world economy is slowing, weighed down by high and sticky inflation and sharply higher interest rates, which will translate into weaker demand for our exports.
Huntley said even though China’s reopening is likely to prevent a global recession it is unlikely to reverse the cyclical downturn as the boost from China will be partly offset by the slowdown in most advanced economies.
“Furthermore, commodity prices, which propelled the recovery in mining profits since the darkest days of the pandemic, are receding from their war-induced highs,” she said.
“The weak rand will offer some relief, but not enough to spur on a sustained recovery. As such, we expect value added by mining and manufacturing to decline in 2023.”
Huntley said Nedbank expects output in the two sectors to contract in the first and second quarters before gradually improving over the year’s final two quarters.
“Again, the anticipated recovery assumes that load-shedding becomes more predictable, settles on average around stages 3 to 4, rather than stages 4 and above, and that both sectors rapidly expand their access to alternative energy sources. Given the experience in quarter one, these are pretty bold assumptions,” she said.
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