21 Feb 2019
Can the deteriorating budget deficit continue?
By: Bradley Mitchell, Head: Research, Sasfin Wealth
The consolidated budget deficit for FY19/20 was revised to 4.5% of GDP, which is not only notably worse than its 3.6% estimate in FY18/19, but also a further deterioration on the actual 4.2% FY18/19 deficit. In FY19/20 government expects to spend ~R240bn more than it earns.
The usual options to reduce the fiscal gap would be to improve government revenue by raising tax rates and/or slow growth in government expenditure (fiscal consolidation). However, given a combination of factors such as an upcoming national election, an already strained tax base and a low growth outlook, it would seem to be very difficult for the finance minister to introduce significant spending cuts or increase personal income taxes.
Lower revenue projections – a major concern
The tax revenue estimate for FY18/19 was revised down again by a further R15.4bn, which brings the total revenue shortfall to a staggering R42.8bn. These following already substantial downward revisions in October 2018.
Persistently weak economic activity, predominantly in the mining and financial sectors, resulted in a moderation in corporate income tax receipts. Job losses, lower wage settlements and reduced bonuses have also put pressure on income tax receipts.
Despite domestic VAT income contributing well, net VAT collections have been considerably lower since October 2018, as SARS accelerated payments of VAT refunds.
Raising an additional R12.8bn in taxes – by ‘stealth’
While the revenue collection shortfall was partly caused by issues with tax administration at the SA Revenue Service (SARS), it was also impacted by broad economic weakness and higher than expected VAT refunds. As such, the tax revenue estimate for FY18/19 has been revised down by R15.4bn, relative to the October 2018 mini-budget. This marks the third consecutive year that tax targets have not been reached.
Personal income tax rates were left unchanged, but so too were the personal tax brackets. This results in ‘bracket creep’, where more people move up into higher tax brackets as incomes rise, even if increases are merely in line with inflation. This ‘stealthy’ tax increase will effectively raise an estimated additional R12.8bn in personal income tax revenue, despite the slight adjustment to rebates.
Tax rates on income, dividend, capital gains and VAT were all left unchanged.