The fiscus is likely to suffer a potential revenue shortfall of R18bn in 2025/26 because the National Treasury has overestimated GDP growth in the budget tabled in parliament recently by finance minister Enoch Godongwana.
Such a shortfall would require the Treasury to look at further tax increases or stringent expenditure cuts if it was to remain committed to its fiscal consolidation and debt reduction strategy. It would also probably mean the implementation of the 0.5 percentage point VAT increase in 2026 that Godongwana has said would not be necessary if there was sufficient economic growth.
PwC tax policy leader Kyle Mandy predicted the revenue shortfall during public hearings by parliament’s two finance committees on the fiscal framework on Tuesday. A total of 22 oral submissions were made by a range of organisations representing civil society organisations, the liquor industry and tax and accounting bodies, among other groups, as well as Cosatu and academics.
Mandy said PwC believed the Treasury’s medium-term growth forecast of 1.8% was optimistic, with the financial services firm projecting 1.1%. If growth did not reach the Treasury’s forecast it would result in large revenue shortfalls.
Compared with the budget forecast of 7% nominal GDP growth for 2025/26, Mandy said a more realistic forecast was 6% which would result in a potential revenue shortfall of about R18bn. The Treasury has already estimated a revenue shortfall of about R17bn for 2024/25 compared with the budget for that year.
The Treasury has repeatedly defended its GDP growth forecasts and is likely to do so again on Friday when it responds to the public submissions.
Mandy supported the government’s commitment to fiscal consolidation, stressing that targeted cuts of expenditure were required to reduce wasteful expenditure and inefficient programmes.
He said that SA’s high personal income tax (PIT) burden would be 10.1% of GDP (up from 6.5% of GDP about 15 years ago) compared with VAT’s 6.2% and corporate income tax’s (CIT’s) 4.1%. This was much higher than other developing countries and many developed countries. The PIT burden, at record levels and second to CIT, was the most damaging tax to economic growth.
The budget made no inflation adjustments to PIT tax brackets resulting in a R19.5bn increase in tax revenue from this tax source.
“This increase equates to and has a similar effect on households’ disposable income as a 75 basis point increase in interest rates and is equivalent to the total interest rate relief provided in the current interest rate cycle,” Mandy said. This highlighted, he added, what impact personal income tax increases would have on economic growth.
“SA has exhausted its ability to extract higher taxes from personal income tax.
“The most growth-friendly and efficient way to raise additional revenues would be through VAT rather than PIT,” Mandy noted, saying that there was more scope now to increase indirect taxes than PIT. While the PIT and CIT burdens were relatively high, the VAT burden and rate remained relatively low.
Mandy said it was a fallacy that taxes had to be maximally progressive. The best practice was to raise taxes in the most efficient manner and address equity and progressivity through expenditure. SA’s spending was highly progressive with a large proportion of the budget dedicated to the social wage — 61% of consolidated noninterest spending over three years.
The public hearings were a forum for representations for an increase in the health promotion levy (sugar tax), for both higher and lower excise duties on alcohol and tobacco products and for a substantial increase in the social relief of distress grant.
There was broad rejection of the proposed VAT increase, which civil society organisations said would negatively affect the poor, and strong arguments for cuts in wasteful and inefficient government expenditure.
ENS tax executive Charles de Wet said that the 0.5% percentage point VAT increase that will come into effect on May 1 posed challenges for businesses, which would have to change their accounting and invoicing systems and pricing of goods and review contracting arrangements. This would be more so with two VAT increases within 12 months.
The possibility that parliament might reject the fiscal framework and the VAT increase would add to the uncertainty and difficulties for business, he said.
University of Cape Town commercial law lecturer Benjamin Cronin highlighted the problem of the minister of finance having the power to announce a VAT increase that would take effect regardless of whether parliament agreed to the fiscal framework or not. This violated key principles in the constitution, he said, and urged parliament to consider amendments to the relevant tax acts that allowed this to happen.
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