How does SA spend its tax revenue?

By Opinion Time of article published May 6, 2021

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Jikku Joseph

THERE are two things that are certain in life: death and taxes. This is true in most parts of the world, and South Africa is no different. The South African Revenue Service (Sars) collects all taxes and hands over the funds to the National Treasury, the department headed by our Finance Minister, to be distributed to the different government departments, as well as the provincial and local governments.

The government has a budget where it manages its tax revenue and public expenditure, like how households budget to manage their income and track their spend while also redirecting money where it is most needed. The medium-term expenditure framework is a three-year spending framework used by the National Treasury to do transparent planning and budgeting formulation.

Budgeting is important

Budgeting is a great way to plan how to spend your money and allows you to determine whether you will have enough money to do the things that you would like to do. There are times where unplanned events, such as the Covid-19 pandemic, show up and force you to restructure your budget to ensure that you can pay for what matters most to you.

If households struggle, South Africa as a whole struggles

In terms of the government’s budget, households contribute the most tax revenue via our personal income taxes. Households have seen a decrease in incomes, as job losses and pay reductions have become more prevalent. The decrease in household income has not only affected personal income tax revenue, but also the consumption of goods and services that are supplied by small businesses, further negatively affecting our country’s financial outlook.

Sars collections have helped ease short-term pressure

Despite this, and the announcement late last year at the 2020 Medium Term Budget Policy Statement of a potential tax revenue shortfall, Sars managed to collect R100 billion more than what was budgeted for. This has provided much-needed room for the government to reprioritise funds to combat the immediate health and economic consequences of the Covid-19 pandemic.

Still, government is borrowing to make up its budget deficit

A budget deficit (or surplus) occurs when government expenditure is more (or less) than the tax revenue collected. South Africa has experienced both budget deficits and budget surpluses in the past, influenced by different factors. It is the deficits that contribute to the increase in national debt, as the government has to borrow money to provide services to South African citizens.

Minister of Finance Tito Mboweni indicated in the 2021 Budget speech that the budget deficit has doubled since the 2020 budget review, and there is an estimated revenue shortfall of R213.2 billion.

As the government borrows money to pay for its public services expenditure, it also must pay off its existing debt and the interest on that debt. South Africa’s current debt costs as a proportion of revenue show that the rising national debt means an ever-increasing share of tax revenue is transferred to creditors, leaving less money for public services (non-interest) expenditure.

The government has no choice but to reduce its other expenses

Non-interest expenses are operating expenses that exclude interest payments. The government is aiming to narrow the country’s budget deficit by managing and reducing non-interest expenditure.

Two material non-interest expenses that the government is proactively working on reducing are the government employee wage bill and financial support for state-owned companies.

There is hope

The outcome of the discussions between the government and the unions for the planned freezing of government wage increases up to 2024 in the next few months could have a significant effect on the budget, possibly helping South Africa to reach a primary budget surplus (that is, tax revenue less government spending excluding interest payments) in 2025.

In recent years, we have seen that the financial performance of state-owned companies puts pressure on government finances. Covid-19 has contributed to state-owned companies further relying on the government to support them. The government will use its budget to decide between supporting state-owned companies and paying for other expenditure, such as education, health care, policing, economic development and other public services.

The government’s budget can be compared to that of a household or a business that is operating in a deficit. The National Treasury is, however, targeting to move the primary balance into a surplus by 2025, which will have a positive impact on the country’s debt trajectory, because money will be available to pay down its debt.

Jikku Joseph is the managing director at 22seven.

* The views expressed here are not necessarily those of IOL or of title sites.


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