BUDGET | Tax windfall from commodities is temporary, Godongwana warns

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The commodity price boom helped bolster revenue collections.
The commodity price boom helped bolster revenue collections.
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  • Although revenue collections have improved compared to the February budget forecasts, they still remain below pre-pandemic expectations.
  • The temporary tax windfall has been helped by a boost in commodity prices - and will be partially used for reducing the budget deficit and other social relief measures amid the pandemic and the effects of the civil unrest.
  • Risks to the fiscal outlook are linked to the extent of the economic recovery, legal processes associated with the public wage bill, as well as several state-owned enterprises and municipalities facing financial hurdles.

A surge in commodity prices has aided revenue collections - which are expected to be R120.3 billion higher than projected during the February budget. The lift in revenue collections is expected to carry over into the next two fiscal years. But overall, revenue collections are still below pre-pandemic projections, highlighted Finance Minister Enoch Godongwana.

The finance minister on Thursday tabled before Parliament the Medium-Term Budget Policy Statement (MTBPS). The MTBPS outlines government's spending plans over a three-year period, and also includes projections for economic growth and provides an update on the state of public finances.

"This windfall is a welcome once-off boost, but revenue remains well below pre-pandemic projections," he said in an introductory note to the MTBPS document.

Treasury projects revenue of R1.485 trillion for 2021/22. The 2019 MTBPS projected revenue collections of R1.55 trillion for the 2021/22 financial year. The document also indicated that revenue from 2020/21 to 2022/23 is forecast to be R284.7 billion below the 2020 budget projections.

Tax revenues are still below prepandemic projectio
Tax revenues are still below prepandemic projections.

The improved revenue outlook is linked to better-than-expected collections in the final quarter of 2020/21, upward revisions to the economic growth outlook and strong tax collections - specifically from corporates, Treasury highlighted.

"Corporate income taxes in particular have increased due to high commodity prices and a favourable ratio of export to import prices," the MTBPS read. Provisional corporate income tax collections for the first six months of 2021/22 were 44.1% higher than the same period in 2019/20. Corporate income tax accounts for R75.5 billion of the higher projected revenue collections.

Treasury projects a revenue collection of R1.485 trillion this year, up from R1.365 trillion indicated in February.

Treasury outlines sources of tax revenue.
Treasury outlines sources of tax revenue.

Apart from higher export prices that supported higher profitability in mining, as well as improved collections from the manufacturing and finance sectors other contributors to revenue include a stronger recovery in earnings that supported personal income tax revenue. Improvements in household consumption also bolstered VAT collections. Improved import volumes in the first half of 2021 also lead to lower import VAT and customs collections.

The temporary windfall this year will still give government the space to deal with fiscal pressures and stabilise public finances. The consolidated budget deficit as a measure of GDP is projected to be 7.8% this year, before narrowing to 4.9% in 2024/25.

This is also the year government expects revenue to exceed non-interest spending - the last time this happened was in 2008/09. As for the debt-to-GDP ratio, it has been revised to 69.9% from 74.1% previously. The debt-to-GDP ratio will peak at 78.1% in 2025/26 before declining.

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% in the current year.

"Strong and sustained economic growth, coupled with greater efficiency in revenue collection, is needed to raise the tax-to-GDP ratio over the medium term," Treasury said.

Revenue outlook

While Treasury expects the commodity price rally to support the remainder of the year, export commodity prices are expected to decline, and this will also impact terms of trade. "Windfall commodity revenues are unlikely to provide significant additional revenues beyond 2021/22," Treasury said.

In its Monetary Policy Review, the SA Reserve Bank similarly noted the positive impact of commodities on revenues - and warned that as downturn in commodities would have consequences.

Revenue is projected to average 23.7% of GDP over the medium term. By comparison, main budget expenditure will reach 30.7% of GDP in 2021/22 and will moderate to 28.6% of GDP in 2024/25. This is linked to fiscal consolidation measures.

But risks to the fiscal outlook remain - they are linked to the extent of the economic recovery impacted by a reversal of the commodity cycle and changing global finance conditions, slow implementation of structural reforms to enhance growth, as well as the Covid-19 pandemic. During a briefing Godongwana said the low rate of vaccination is disturbing. He added that it is too early to indicate what a fourth wave's impact will be on expenditure.

A further deterioration in public finances due to various spending pressures also remain a risk. These pressures include the public wage bill.

State-Owned Enterprises (SOEs) and municipalities in poor financial positions also present risks. Godongwana said 43 municipalities are a "major problem" but following the municipal elections government along with "all other political parties" need to work to stabilise them.

As for SOEs, Godongwana said Treasury wants to practice "tough love". While there is no provisioning in the MTBPS for additional spending, he is also doubtful provisioning will be made in February. He explained there is a practice whereby SOEs underperform and then get bailouts - and this can no longer be the case.

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