Soaring commodity prices helped boost tax revenues.
- While revenue collection has improved from February’s budget forecast, it still remains below pre-pandemic expectations.
- The temporary fiscal windfall has been aided by an increase in commodity prices – and will be partially used to reduce the budget deficit and other social assistance measures amid the pandemic and the effects of civil unrest.
- Risks to the fiscal outlook relate to the scale of the economic recovery, legal procedures associated with the public wage bill, as well as several public enterprises and municipalities facing financial obstacles.
Soaring commodity prices have made it easier to collect revenue – which is expected to be R 120.3 billion higher than forecast in the February budget. The increase in tax revenue is expected to continue over the next two years. But overall, revenues collected are still lower than projections before the pandemic, said Finance Minister Enoch Godongwana.
The Minister of Finance tabled the Medium-Term Fiscal Policy Statement (MTBPS) in Parliament on Thursday. The MTBPS describes the government’s spending plans over a three-year period, also includes economic growth projections, and provides an update on the state of public finances.
“This windfall is a welcome one-off boost, but revenues remain well below pre-pandemic projections,” he said in an introductory note to the MTBPS document.
The Treasury forecasts revenue of R 1 485 trillion for 2021/22. The 2019 MTBPS forecasted revenue of 1.5 trillion rand for the 2021/22 fiscal year. The document also states that revenues from 2020/21 to 2022/23 are expected to be R 284.7 billion lower than the 2020 budget forecast.
Tax revenues are still lower than pre-pandemic projections.
The improved revenue outlook is tied to better-than-expected collections in the final quarter of 2020/21, upward revisions to the outlook for economic growth and strong tax collections – especially from businesses, noted the treasure.
“Corporate income taxes in particular have increased due to high commodity prices and a favorable ratio of export and import prices,” the MTBPS reads. Provisional corporate tax collections for the first six months of 2021/2022 were 44.1% higher than for the same period in 2019/20. Corporate income tax accounts for R75.5 billion of the highest expected revenue.
The Treasury is forecasting revenue collection of R 1,485 trillion this year, compared to R 1,365 trillion reported in February.
The Treasury describes the sources of tax revenue.
In addition to higher export prices which have supported higher profitability in mining, as well as improved collections in the manufacturing and financial sectors, other income contributors include a stronger recovery in income which has supported personal income tax revenues. The improvement in household consumption also supported the collection of VAT. The improvement in import volumes in the first half of 2021 also resulted in lower import VAT and customs levies.
This year’s temporary windfall will still give the government the space it needs to cope with fiscal pressures and stabilize public finances. The consolidated budget deficit as a measure of GDP is expected to be 7.8% this year, before narrowing to 4.9% in 2024/2025.
This is also the year the government expects revenue to exceed non-interest expenditure – the last time this happened was in 2008/09. As for the debt / GDP ratio, it was revised to 69.9% against 74.1% previously. The debt-to-GDP ratio will peak at 78.1% in 2025/26 before falling.
The tax-to-GDP ratio, a measure of the country’s tax burden, fell to 22.5% in 2020/21. The ratio is expected to increase to 24.1% during the current year.
“Strong and sustained economic growth, coupled with greater efficiency in revenue collection, is needed to increase the tax-to-GDP ratio in the medium term,” the Treasury said.
While the Treasury expects higher commodity prices to support the rest of the year, export commodity prices are expected to fall, which will also have an impact on the terms of trade. . “Windfall commodity income is not expected to provide significant additional income beyond 2021/22,” the Treasury said.
In its monetary policy review, the South African Reserve Bank also noted the positive impact of commodities on income – and warned that a fall in commodities would have consequences.
Revenues are expected to average 23.7% of GDP over the medium term. By comparison, the main budgetary expenditures will reach 30.7% of GDP in 2021/2022 and moderate to 28.6% of GDP in 2024/2025. This is linked to fiscal consolidation measures.
But risks remain to the fiscal outlook – these relate to the extent of the economic recovery impacted by a reversal of the commodity cycle and changing global financial conditions, the slow implementation of structural reforms to strengthen growth, as well as the Covid-19 pandemic. During a briefing, Godongwana said the low vaccination rate was concerning. He added that it is too early to say what the impact of a fourth wave will be on spending.
A further deterioration in public finances due to various spending pressures also remains a risk. These pressures include the public wage bill.
Public enterprises and municipalities in poor financial condition also present risks. Godongwana said 43 municipalities are a “major problem”, but after the municipal elections the government and “all other political parties” must work to stabilize them.
As for state-owned enterprises, Godongwana said the Treasury is keen to practice “hard love.” While there is no provision in the MTBPS for additional expenses, he also doubts that a provision will be made in February. He explained that there is a practice of SOEs underperforming and then getting bailouts – and that can no longer be the case.