Without SME sector thriving, tax revenue will continue to dry up

It just gets harder and harder for finance minister Enoch Godongwana. He is not going to please everyone with his upcoming budget speech, and anything he proposes is going to involve big trade-offs.

Like any business we fund, the government needs to increase income or reduce expenditure, (and preferably both of these) to budget successfully, but it is obvious that doing so will continue to prove difficult.

SA’s small and medium-sized enterprises (SMEs) market has been fighting for survival through the pandemic, struggling with a weak economy, load-shedding, record fuel price increases, unrest in KwaZulu-Natal and generally lower profitability. These small businesses are the lifeblood of our economy and the sector is a driver of growth and employment.

We need this sector to be growing and performing to see our huge unemployment number reduced. Without this sector thriving, tax revenue will continue to dry up. This means the government needs to create that enabling business environment to allow small business to flourish. Godongwana appears to recognise this, which will be music to the ears of small business owners.

However, the  government has union federation Cosatu on one side demanding a reversal of budget cuts, public wage freezes and austerity. Unfortunately, almost half of other government spending goes into public sector wages and debt service costs. If you are not growing revenue, public sector spending needs to be contained. I do not expect this will happen in our current environment.

The government is still under pressure to provide support to millions of poor South Africans as well as those who have lost jobs during the pandemic, with the official unemployment number close to 35%. Supporting both of these groups will drive increased costs.

Unemployment support in the budget usually comes down to increases in grant funding, which is visible and popular with voters. While it is definitely necessary, this alone is not a long-term solution since we are not addressing the underlying problem of unemployment. I expect the recently approved R10.6bn World Bank loan will be used in part to fund these social grant costs, but this will only add to the debt burden down the line. This all needs to be serviced, and ultimately this means taxes will need to rise.

We do expect that the minister will continue to look at reducing the corporate tax rate over time to align us more closely with our trading peers and make us more globally competitive.

The biggest source of tax revenue is personal tax and then VAT. However, only employment will drive these higher sustainably — increasing unemployment means you lose both personal tax (because people are not working) and VAT (because they have less disposable income and stop spending).

Raising personal tax and VAT seem to be the only levers government has to increase tax at the moment, but we would warn against this as raising either of these would be killing the goose that lays the golden egg. It does appear that Covid-19 has resulted in an increase in emigration, which is eroding the tax base, and further tax increases on the individual will not encourage entrepreneurs and small business owners to invest more in the country.

The solution we would like to see is to create an enabling environment for business and SMEs to prosper and create jobs. The vast majority of private sector jobs come from SMEs, so this is where we would like to see more government support. We want to see plans that help SMEs operate efficiently with as little cost and red tape as possible. 

“Enabling” does not mean interfering in the business operations. It means ensuring world-class electricity supply, roads and infrastructure while focusing energy on combating crime and corruption — this allows businesses to focus on business rather than all the ancillary noise. Running a business is never easy, but without a supportive environment it is even harder.

In the past couple of weeks we have heard some positive comments from Godongwana and President Cyril Ramaphosa about supporting SMEs. However, seeing this translate into action is what is important.

There has also been positive news on global economic growth, with many economies rebuilding and increasing demand, and that is potentially good news for SA and our own growth prospects. While the IMF has cut growth forecasts for SA we have been seeing some real growth in the SME environment in the last few months, which is a good indicator of positivity returning to the market. This is backed up by credit bureau data that suggests business confidence is picking up — it also bodes well for the government’s future tax revenues.

Godongwana needs to continue spending on Covid-19 recovery and the vaccination rollout. Getting people to work and businesses operating at 100% capacity is the quickest way to economic recovery. This should be a clear priority and is especially important to kick-start the sectors that have been hit hardest, like hospitality and travel — when you consider how important tourism is to the local economy and the number of small businesses and restaurants operating in this sector. This is where we have seen the most suffering.

Ultimately, economic growth driven by small business is what the country needs to create a strong and sustainable tax base. The minister will struggle to reduce spending and will also have a hard time increasing taxes over the coming 12 months, so focusing on a thriving small business sector is the real solution to increasing the tax base and revenue.

• Rossiter is chief risk officer for SME services provider Lulalend.