Booming tax revenues for the first quarter of the fiscal year will boost the government’s plan to slow down rising debt and knock public finances into better shape even as it grapples with the effects of the level 4 lockdown and recent civil unrest.
This is provided not too much of the windfall is spent ahead of next February, which would be difficult in a context of rising demands.
The most recent data for June revealed a sharp rise in tax collections from the first quarter of 2020, driven by robust corporate income taxes.
If sustained, the windfall could reach about R100bn, according to economists, and could mean a much rosier set of fiscal metrics in the upcoming medium-term budget policy statement.
Some of the windfall — R33.85bn — has already been allocated to relief and recovery efforts after July’s violent looting. The relief package is aimed at supporting businesses and households in the wake of another level 4 lockdown and the civil unrest in parts of KwaZulu-Natal and Gauteng.
It includes the extension of the R350 social relief of distress grant to March 2022 at a cost of R26.7bn.
Government finance data for June saw a roughly 88% year-on-year increase in tax revenues, recording a surplus of R63bn. The windfall has been driven by company income tax, which economists attribute to a mining sector that has been buoyed by strong commodity prices.
Though this is off a low base, following the hard lockdown instituted in 2020, the figures compare well with previous fiscal years, according to an Absa research note.
The windfall notwithstanding, there are risks that these gains could be eroded, say economists. Most notably, these are if the commodities boom fades sharply, or increased spending on items such as social grants and public servant salaries become locked in to government spending.
“This is compelling evidence that revenue is well ahead and probably likely to stay well ahead for the remainder of this year,” said Stanlib chief economist Kevin Lings.
The overrun, which Lings believes could surpass the R100bn mark, suggests the Treasury could present markedly improved fiscal metrics in the upcoming medium-term budget policy statement. This includes a consolidated budget deficit that could be lower by 1.5 percentage points and a debt-to-GDP trajectory that is “convincingly” below 80%.
February’s budget pencilled in a deficit of 9.3% for the 2021/2022 fiscal year, and a debt-to-GDP ratio of 81.9%.
The state may be able to show it has “turned the corner in terms of being able to effect fiscal consolidation”, said Lings.
There are, however, questions about additional spending in the form of increased salaries for public servants and the extension of the R350 grant. The recent public sector wage deal includes an additional R18bn price tag in the form of monthly cash gratuity payments.
“The risk is that [you] build in a lot more expenditure because you have had one year of spectacular revenue and it represents an ongoing constraint” to the fiscus, said Lings.
There are several risks to the improved fiscal outcomes, said Absa economist Peter Worthington, starting with whether commodity prices will stay strong.
“We still are in a very challenging fiscal situation,” he told Business Day.
“This is a great windfall. SA is lucky to have this because the situation would have looked so much worse without it. But we are not out of the fiscal woods.”
Worthington also flagged the implications of public sector pay increases in future years. The recent wage deal includes a safety clause to continue paying the gratuity in the event that future wage deals between the state and its workers cannot be finalised.
“In our view, this effectively turns what is supposed to have been a one-year sweetener into an element of permanent pay,” said Worthington.
The Constitutional Court’s verdict on the state’s decision to renege on paying the final instalment of the 2018 wage deal poses another risk, he added. The state reneged on the last leg of the deal and if it has to pay for it, the baseline of the salary bill will rise by about the consumer price index plus 2%.
“We really just don’t know whether they are going to back the government or the unions and that is a sizeable upside spending risk,” he said.
In addition, the government may find it very difficult to rescind the extension of the social relief of distress grant, said Worthington.
The tax windfall has bought SA some time, he said, but it still needs “several years worth of diligent fiscal discipline.
“In order to convincingly address our fiscal and our socio-economic deficits, we desperately have to have stronger growth,” said Worthington.
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