Commodity price rally may help ease pressure of revenue shortfall
Income tax hike would weigh more heavily on middle-income earners, says Standard Bank
A recovery in commodity prices and a possible expansion of the economy by 1.4% in 2017 may give the Treasury room to manoeuvre and buy more time before a hike in value-added tax (VAT) is required, according to a Standard Bank report published on Monday.
An increase in the VAT rate from 14% is widely considered to be a last resort to boost much-needed government revenue and may not feature when Finance Minister Pravin Gordhan delivers the 2017 budget in Parliament on Wednesday. But the Davis Tax Committee has said a hike of one percentage point in VAT could collect between R15bn and R20bn in additional funds.
Anaemic economic growth in 2016 has resulted in a revenue shortfall and Gordhan is expected to raise taxes across the board in the new year.
Siphamandla Mkhwanazi, Standard Bank economist and author of the report, said, "Given low economic growth, the finance minister will face tough choices."
In the medium-term budget statement in October, Gordhan said tax increases were necessary to raise an additional R28bn for the 2017-18 tax year and a further R15bn in 2018-19.
But a VAT hike on goods and services, which will lead to increased living costs and a decline in purchasing power for consumers, is considered to be politically unpopular as it will hurt low-income earners most. It is not seen as an option Gordhan will pursue — yet.
Household expenditure data from the Bureau of Market Research at Unisa shows that households earning below R89,000 annually spend between 36% and 42% of their income on food and beverages.
SA’s economy took a beating in 2016 and is expected to have recorded growth of 0.5%. It will recover modestly in 2017, according to the Treasury. The official GDP figure will be released by Statistics SA on March 7.
Meanwhile, commodities such as iron ore and copper have rallied on the back of increased demand from China since the beginning of 2017. Iron ore rose from $40 a tonne in 2016 to $90 a tonne in 2017, but the rise is not seen as sustainable. Kumba Iron Ore recently said $50-$60 a tonne would be a fairer price in the longer term.
In his report Mkhwanazi also said a personal income tax hike would weigh more heavily on middle-income earners than on other groups.
Weak GDP growth might constrain revenue collection from personal income tax in future. "GDP growth over the next three years is expected to remain structurally below potential and is unlikely to create adequate new employment to broaden the tax base."
Mkhwanazi said: "Growth in personal income tax revenue can only really be achieved by higher taxes and/or bracket creep." Bracket creep, which is the increased tax liability that results from an increase in salaries and wages, most affects middle-income earners.
Mkhwanazi said research from the Bureau of Market Research at Unisa showed approximately 85% of households in the middle segment relied on salaries and wages as their primary source of income. In comparison, 48% in the low-income group and 75% of affluent earners had salaries and wages as the main income source.
The middle-income segment includes civil servants such as teachers, nurses and social workers. "Given the government, the country’s largest employer, is currently scaling down on its wage bill, the purchasing power of this group is at risk," said Mkhwanazi, adding that debt levels were higher among the middle segments than for low-income and affluent earners.
Corporate income tax would benefit from higher commodity prices. Due to the economic slowdown and fall in commodity prices, the corporate tax contribution to total tax revenue has been falling in recent years — from 21% in 2011-12 to 18% in 2015-16.
"An increase in the corporate tax rate is seen as potentially counterproductive since SA is believed to have reached the threshold above which additional corporate tax increases are likely to have a negative effect on revenue collected," Mkhwanazi said.
But the recent commodity price rally has boosted earnings of major tax-contributing corporates in the mining sector, resulting in better-than-expected corporate tax collections in recent months.
He expected the income gap to narrow, although it would remain elevated.
Social grants and public sector employment via the Expanded Public Works Programme and other programmes have made some progress to reducing income inequality. More than 17-million South Africans receive social grants and about 24% of households rely on grants as their primary source of income.
"We estimate that the ratio of average income in the lowest income group to average income in the highest income group declined by about 43% over the past five years.
"In 2011, on average for every R1 earned by an individual in the lowest income group, an individual in the wealthy income group earned R8,086. In 2016, we estimate this to have moderated to R4,578 for every R1," Mkhwanazi said.