The following commentary on the 2024 Budget is from Carla Rossouw, the head of tax at Allan Gray.
It is clear from the 2024 Budget that Finance Minister Enoch Godongwana finds himself between a rock and a hard place ahead of a watershed election in May. His options are limited to achieve stability in the country’s finances: borrow more, raise taxes, or cut government expenditure.
It looks like the minister will pull all these levers in one way or another – although it may not be immediately obvious that this is what he is doing. Rather than borrowing more, Godongwana plans to draw down R150 billion from the Gold and Foreign Exchange Contingency Reserve Account to lower the country’s debt burden.
To limit the negative impact on economic growth, the 2024 Budget proposals will not increase tax rates in any category other than excise duties.
In November 2023, the Medium-Term Budget Policy Statement sounded the alarm on weaker public finances, with both personal income tax (PIT) and corporate income tax (CIT) collections coming under pressure.
PIT revenues continue to struggle because of high unemployment, retrenchments, and salary cuts in response to a weak economy. Any increase in PIT rates would therefore further worsen the current position and further increase the financial burden on households.
CIT windfalls experienced in recent years, particularly owing to price increases in key commodities such as mining and manufacturing, which assisted in managing the books, have also dwindled, resulting in disappointing collections.
While the big tax levers (PIT, CIT, and valued-added tax) haven’t been pulled during this election year, additional revenue still needs to come from somewhere. This gap is being addressed with the minister opting to raise additional PIT by not adjusting the PIT brackets (commonly referred to as bracket creep), the rebates, and medical tax credits for inflation, in addition to above-inflation adjustments to excise duties for alcohol and tobacco.
Bracket creep is an effective way to raise revenue as the impact on household income is not immediately evident to the public: the tax brackets remain the same, but if your salary goes up by inflation, you come out poorer.
It was a relief to many that Godongwana stayed away from VAT. In a struggling economy, to increase VAT, as well as not addressing bracket creep, would have been a double whammy. But this does not mean that an increase is off the table.
As in the 2023 Budget, the government again proposes no changes to the general fuel levy and Road Accident Fund levy to reduce pressure on households and businesses.
SARS to the rescue
Godongwana once again placed great responsibility on the South African Revenue Service (SARS) to enhance its administrative and enforcement capabilities to strengthen revenue collections. This is evident from SARS’s efforts to embrace technology in the form of digitising or modernising the tax system. This comes as no surprise as South Africa continues to battle with a significant tax gap (the difference between what should be paid and what is actually paid).
Although there was no mention of a wealth tax, the focus on high-net-worth (HNW) individuals remains. Taxpayers with business interests are required to declare their assets and liabilities (at cost) in their tax returns each year, and those with assets above R50 million are further required to declare specified assets at market values on their tax returns. Further to this, trusts have also recently been added to SARS’s watchlist because these vehicles are commonly used by HNW individuals to accumulate wealth in a tax-efficient manner.
Government spending pressures
The upward trajectory of government spending remains a concern, particularly regarding the public sector wage bill, which remains the government’s biggest expenditure, the country’s exorbitant debt-servicing cost (the fastest-growing item of state expenditure) and additional spending pressures associated with state-owned enterprises, specifically Eskom and Transnet.
Godongwana announced that further measures will be implemented to rein in government spending and expedite structural reforms, but the results will not be visible immediately and will take time to deliver.
The Social Relief of Distress grant has been extended to 1 March 2025 at a cost of R33.6bn.
To keep pace with inflation and increase access, the permanent social grants are also being increased.
Seeking a sustainable solution
Whether the objectives as set out in the Budget are achievable will be determined by the government’s political will to anchor expenditure and put resources to better use, which is fit for purpose to yield real results. What this country needs most is sustainable economic growth – increasing taxes is one way to fund the tax shortfall, but there is no substitute for growing the economy and creating jobs.
Disclaimer: The views expressed in this article are those of the commentator and are not necessarily shared by Moonstone Information Refinery or its sister companies.
