COLLECTED INCOME: Rocks on a roll for revenue

A rock star. That’s what finance minister Enoch Godongwana must have felt like when announcing revenue collection came in at R182bn more than expected. But it certainly wasn’t a solo performance. The real stars were, well, rocks — the sort that contain platinum, coal, iron ore, manganese and gold.

"This positive surprise has come mainly from the mining sector due to higher commodity prices," said Godongwana in his budget speech.

Though demand for resources slowed somewhat in the second half of 2021, the companies that profit from it are only now reporting some of those windfalls.

As a result, corporate tax receipts outperformed estimates by more than R105bn.

"We’ve also seen higher revenue from other sectors and other tax instruments, such as personal income tax and VAT," said Godongwana.

The manufacturing and financial sectors chimed in as the SA economy recovered from its sharp contraction during the first year of the Covid pandemic. This is good news as these two sectors historically represent more than half of corporate tax collections.

Godongwana reckons GDP growth clocked nearly 5% last year. The stronger activity is evident in the rise in VAT receipts as consumers emerge from a period when spending was, to a large extent, also masked and sanitised.

As a result, tax revenue is expected to reach R1.55-trillion this fiscal year, surpassing not only Godongwana’s forecasts in his medium-term budget policy statement in October, but also those of his predecessor, Tito Mboweni. This year’s collection beats even the rosiest pre-pandemic estimates.

Personal income tax garnered R554bn for the state coffers, VAT R383bn and corporate income tax a further R318bn. Taken together, these three revenue streams account for more than 80% of total tax revenue.

All three categories came in better than expected. But instead of spending the entire windfall or passing most of the benefit on to taxpayers or consumers, the National Treasury says it has decided to continue down its road of fiscal consolidation.

"The improved revenue performance is not a reflection of an improvement in the capacity of our economy. As such, we cannot plan permanent expenditure on the basis of short-term increases in commodity prices," cautioned Godongwana.

Page through the budget document to assumptions shaping the Treasury’s macroeconomic forecasts and you’ll see it pencilling in a further rise in the prices of gold, platinum and palladium for the next three years, with iron ore just about unchanged.

Even then, the economic growth projections average a vanilla 1.8%. So Godongwana is right not to write too many cheques.

It is hard to imagine a world in which revenues can remain this strong in the absence of further reforms in other parts of the economy, says Citi economist Gina Schoeman.

"Effectively, SA has been saved by stronger-than-expected commodity prices, which have allowed expenditures that were unforeseen to be absorbed," she says.

Codera Analytics economist Daan Steenkamp says it is unfortunate that so much of the windfall from high commodity prices is being used to fund continuing expenditure rather than to reduce debt.

"Against a background of rising interest rates, high and growing public debt increasingly constrains the government’s ability to respond to adverse shocks. High debt also weighs on sorely needed investment by raising our country’s risk premium and long-term borrowing costs," says Steenkamp.

The government, however, says it is using part of the windfall to reduce its gross borrowing requirement by R135.8bn in 2021/2022, R77.5bn in 2022/2023 and R54bn in 2023/2024.

That means reducing the budget deficit, worsened by the pandemic, from mindblowing levels to merely eye-watering.

The upshot of all this fiscal consolidation is that gross loan debt is now expected to stabilise at 75.1% of GDP in 2024/2025, instead of 80.5%, and a year earlier than projected by Mboweni in last year’s budget.

Before the welcome surprise from commodities, the Treasury expected to spend more than 22c for every rand of revenue collected to service debt. It has now revised this to 17c, but estimates it will rise to slightly more than 20c over the medium term as the resources price boom tapers off.

The reality is that the interest on debt keeps eating into resources that should have been available for other things, says Citadel economist Maarten Ackerman.

"The interest cost at this stage is higher than our total budget for health and education, so that’s a big worry," he says.

Godongwana has styled his budget as the third in a series. For two years, states the Budget Review, policy has focused on broadening the tax base, improving administration and lowering tax rates.

The clearest indication that he intends to continue singing from Mboweni’s hymnbook could be seen in his sticking to the commitment to lower the corporate tax rate. On Wednesday, Godongwana announced the long-awaited cut of one percentage point, to 27%.

The reduction seems long overdue, given that SA’s rate is high compared with most of its trading and investment partners. For example, the Organisation for Economic Co-operation & Development, a club of rich nations, sports an average company tax rate of 23%.

But with corporate taxes clearly the goose that laid the golden eggs in this year’s budget, why would the Treasury now give away the future’s gilded omelettes?

"Changes to corporate income tax have the largest impact on investor behaviour — influencing jobs, wages and prices — and can support economic growth," reads the Budget Review.

Momentum Investments economist Sanisha Packirisamy says though the reduction is modest, it could help ignite an investment drive and pave the way for further tax cuts.

But every billion Godongwana gives, he takes back somewhere else. In this case, the lower corporate tax rate will save companies about R2bn, but a tougher stance on interest deductions and assessed losses easily recoups that amount.

The signal, however, is one of a commitment to tax cuts. It shows the Treasury has come a long way, realising the folly of earlier personal income-tax hikes.

Half a decade ago, a new top tax bracket of 45% was created to rake in a larger part of taxable incomes above R1.5m. The move now appears to have generated significantly less than the projected annual R4.4bn, reads the Budget Review. Total real taxable income for those affected by the amendment actually declined in the year of the adjustment as taxpayers changed their behaviour. People suddenly "earned less" and taxable incomes between R1.25m and R1.5m increased by close to 4% at the time.

Though there’s little to be celebrated in terms of tax cuts, the budget does allow for other forms of tax relief.

Godongwana and his team again adjusted the tax brackets upwards to help wages and salaries keep track with inflation. In previous years, "bracket creep" was used to pad revenue in a stealthy way, as it gave the fiscus a substantial slice of workers’ wage increases.

This time around, there is inflationary relief through a 4.5% adjustment.

More revenue will, however, be squeezed from other places.

Though the fuel and Road Accident Fund levies remain unchanged, the vehicle emissions tax rate on passenger cars will increase to R132 from R120 a gram of carbon dioxide a kilometre. From April, the rate on double-cab bakkies will increase from R160 to R176.

The Treasury’s usual easy target of excise duties on tobacco and alcohol — the so-called sin taxes — got off relatively lightly by recent standards. The government proposes to increase excise duties on alcohol by 4.5%-6.5% for the year to come, while smokers could pay 5.5%-6.5% more.

Drinking and smoking have been taxed for decades. A vice that has only recently walked into the Treasury’s crosshairs is sugar. Since its introduction four years ago, the "health promotion levy" — a tax on sugary drinks — has become a mainstay in the revenue pages, bringing in about R2bn annually.

Cane sugar producers have complained bitterly at its effects as beverage manufacturers often simply substitute other sweeteners for the original.

How sustained its benefit will be for the fiscus in the long run remains to be seen. The Treasury will, in the meantime, increase the levy for beverages with more than 4g of sugar content per 100ml to 2.31c a gram, from 2.21c, starting in April. Consultations will also be initiated to consider lowering the 4g threshold, says the Budget Review.

The Treasury aims to shake up more of the drinks industry than just the fizzy ones as the consultations will also look into extending the levy to fruit juices.

Vapers have for years been able to inhale without coughing up, but excise duties are coming their way. The government aims to apply a flat excise duty rate of at least R2.90/ml to nicotine and non-nicotine solutions and to institute it by January next year.

Consumers are likely to pay slightly more for their shopping from April as the levy on plastic bags is increased to 28c a bag from 25c. This is to further discourage shoppers from buying plastic and to support reuse and recycling, according to the Treasury.

A light approach to taxation can obviously mean more than one thing. The levy on incandescent lightbulbs will climb by 50% to R15 from April. If someone raised my tax by 50%, I’d be incandescent too, with rage.