Extended tobacco ban contributed to low tax revenue as debt rises

Finance Minister Tito Mboweni delivers the medium-term budget in Parliament, 28 October 2020. Picture: GCIS

‘Without a major reduction in public spending, debt will continue to accumulate and interest payments – which already consume 21 cents of every rand of main budget revenue – will crowd out other spending.’

The longer than expected tobacco ban during the Covid-19 lockdown levels was one of the factors that contributed to low tax revenue, as tax revenue for the 2020/21 financial year now stand R312.8 billion lower than what was projected in the 2020 budget review.

This despite revenue collection being revised down by R8.7 billion in June’s adjusted budget review.

This deterioration, tabled in the medium-term budget policy statement on Wednesday, was in line with the revised economic growth projections and expected tax performance following the Covid-19 pandemic.

Besides the lockdown tobacco ban, factors affecting low revenue collection include a significant decline in compensation and salaries, and as a result, personal income tax.

Monthly collections remained below the 2019/20 levels in many categories such as domestic value-added tax (VAT), which collected 6.7% lower revenue in the first six months of the 2020/21 year as compared to the same period in 2019/20. This was due to a sharp reduction in consumption.

“The shortfalls are exacerbated by a reduction in the tax-to-GDP ratio, because the tax system automatically adjusts to reduce the amount of revenue that is collected for a given level of economic activity in the event of a crisis,” the policy statement said.

However, government’s spending remained too high for the tax base, with the gap likely to increase due to the 2020 recession.

Recent tax increases generated less revenue than expected, while evidence has shown that tax increases could have a negative effect on GDP growth, said the policy statement.

“Without a major reduction in public spending, debt will continue to accumulate and interest payments – which already consume 21 cents of every rand of main budget revenue – will crowd out other spending.”

Government however projected a tax increase of R5 billion in the 2021/22 financial year, R10 billion in 2022/23 and 2023/24 and R15 billion in 2024/25.

“The improvement in revenue collection over the next four years includes the revenue proposals announced in the June special adjustments budget.”

rorisangk@citizen.co.za

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