The two big questions ahead of Mboweni’s first medium-term budget

New Minister of Finance Tito Mboweni will have been in the job barely two weeks when he has to present the Medium-Term Budget Policy Statement (MTBPS) in Parliament on October 24. His own contribution to what he delivers is likely to be minimal, given that most of it must already have been finalised by National Treasury and cabinet.

He will, however, be the face of a serious government conundrum.

In February, then finance minister Malusi Gigaba projected that the South African Revenue Service (Sars) will collect R1.345 trillion. That is the figure required to make the budget he presented work.

The first major question Mboweni will have to answer is whether that target is still achievable. Given that South Africa was in recession for the first six months of this year, will Sars still get there?

The impact of recession

“It’s no secret that our revenue targets are aligned with our economy,” says Mike Teuchert, national head of taxation services at Mazars. “If the economy chugs along well then we are in a position to reach our targets. If the economy doesn’t reach the growth projections, then there is a high likelihood we won’t.”

Back in February, the consensus view was that South Africa’s economy would grow at around 1.5%. That has since been revised down significantly, and 1% growth would be a good outcome from where the country is now.

This indicates a very difficult operating environment for companies. If they struggle to generate profits, that creates a ripple effect with serious negative consequences for tax collection.

“On the corporate income tax side, if companies are not doing well, not making profits, you will see an impact on how much tax they pay,” Teuchert points out. “They might also not give increases or they could trim their staff complement, and as a result, personal income tax revenues could be affected. If consumers don’t have income because they don’t have employment, Vat collections could be under pressure as well. So, overall, it’s not great for Sars and Treasury if we have an economy that is not growing at the expected level.”

The problem this creates for Mboweni is that if Sars is not going to achieve its collection targets, what can be done about it? The country has already had to increase taxes substantially over the last few years. Will the finance minister have to consider doing even more?

More tax increases?

Historically, no changes to the tax regime are implemented at the MTBPS. However, the minister may give indications of what the government is thinking.

The trouble for Mboweni is that there are few places left for hikes to take place. Personal income taxes, which make up the bulk of tax revenues, have already been raised to a point where further increases are unlikely to result in higher collections.

Mazars senior tax consulting partner Bernard Sacks points out that government has already raised the top marginal rate from 40% to 45%, but that hasn’t delivered even a 1% increase in revenues. There is therefore little to be gained by lifting this further.

In addition, the country’s corporate tax rate of 28% is already at the higher end globally. Given that South Africa is desperate for investment, the country can hardly afford to scare companies away by making this higher.

That, once again, leaves value-added tax (Vat). Government’s decision to raise the Vat rate by 1% to 15% earlier this year was already widely unpopular, even though it is still fairly low by international standards. In an election year, it could be very difficult to raise it again.

Sacks, however, believes that if tax revenues are going to fall well short of projections, Mboweni might not have much choice.

“I think they probably should have increased Vat by 2% in the February budget,” he argues. “They possibly missed an opportunity.

“I do think there is a reasonable prospect of an increase in the Vat rate in February next year again,” Sacks adds. “We need to balance the books, and at the moment I think we’re pretty far off.”

The other side of the equation

Whether the government is able to raise more revenue or not, there is still the other side of the budget that Mboweni needs to address – expenditure. While there may be no obvious areas where major cuts can take place, something has to be done to deal with the amounts being lost to irregular and wasteful expenditure.

Auditor-General Kimi Makwetu on Wednesday reported to parliament that irregular spending by national and provincial government departments together with state-owned enterprises rose from R45.3 billion in March 2017 to R45.5 billion in March this year.

“I don’t believe that there are obvious areas to cut spending, but there are areas where wastage is taking place,” says Sacks. “There doesn’t seem to be any sanction for that, and maybe there should be. We need to see more accountability.”

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