The Covid-19 pandemic has increased the pace of deterioration of South Africa’s government finances because revenue collection has fallen, the cost of borrowing has increased and it has pushed our economy into its longest recession in over two decades. This has severely affected the SME market, which is a big driver of growth (as well as an employer) in the country.
“There’s some positive news on global economic growth we’re seeing, and that’s really great for South Africa and our growth prospects. We have seen some real growth in the SME environment in the last few months, which is a good indicator of confidence returning to the market. It also bodes well for the government’s future tax revenues,” says Garth Rossiter, Chief Risk Officer at SME business enabler Lulalend.
“More importantly, SMEs in SA are looking for signs of improved business confidence, which will drive growth and lead a turnaround in the economy by increasing demand for products and services as people spend more. But I’m not sure what relief the Budget will bring,” he adds.
For this year’s Budget, Rossiter believes the Finance Minister is stuck between a rock and a hard place.
“Government, like any of the businesses we fund, needs its income to exceed its expenses to avoid running a deficit. To budget effectively, it either needs to increase income or reduce expenditure, but both of these are going to prove difficult in this year’s budget.
Minister Mboweni needs to spend on Covid-19 recovery and a vaccination rollout. This is a clear priority. Getting through this pandemic and seeing some light at the end of the tunnel is key to building confidence in the economy and getting people and businesses back to work,” explains Rossiter.
“This is especially important for sectors that have been hit hardest, like hospitality and travel – especially 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,” he says.
Unfortunately, almost half of other government spending goes into public sector wages, and debt service costs. It is positive that the government is planning a nominal wage freeze in the public sector for next 2 or 3 years.
“The assumption is that debt service costs will be the fastest growing expenditure item. If the debt burden grows substantially, we may see further ratings downgrades, which increases the government’s cost of borrowing and results in reduced spending on more meaningful capital projects. This is a vicious cycle,” warns Rossiter.
“There will be money spent on Eskom because, as difficult as that is to swallow, we need reliable power to have any chance of exiting this slowdown. Our businesses need to be able to keep the lights on to enable them to trade – you can’t have lockdowns combined with no electricity and expect to be successful. If our businesses aren’t successful, our tax revenue dries up,” he says.
The budget really needs to focus on employment and creating an environment to support business growth. Rossiter says that the biggest contributor to tax revenue is tax on individuals and then VAT. “A reduction in employment means you lose both of these (personal; because people aren’t working and VAT; because they have less money and stop spending).”
“There is already a strong sense that personal tax at 45% is about at its limit and, by raising this, Mboweni risks killing the goose that lays the golden egg,” cautions Rossiter.
“VAT is more effective to increase but politically difficult to increase, since it’s regressive (poorer families spend a greater share of their income on consumption), so I don’t think this will go up.
This leaves corporate tax – currently at 28%, it is already higher than many of our trading partners and increasing this tax risks making our local businesses less competitive and may also dampen economic growth. Ultimately, the economic growth is what the country needs to create a strong and sustainable tax base,” he says.
Interestingly, it is often the case that increased tax rates result in lower collections, he adds.
“So, it may seem counterintuitive (and I expect it won’t happen), but my ideal would be to see a reduction in the Corporate tax rate. Lower tax rates could be a good step to supporting small business, driving growth and attracting further business to South Africa and thereby increasing tax revenue.”
“Realistically, though, I would be surprised to see any changes in any of these three taxes. We expect a rise in excise taxes (fuel, alcohol and tobacco) although these industries are already on the back foot having endured a challenging lockdown,” points out Rossiter.
A once off-’solidarity tax’ to fund the Covid-19 response, might seem appealing, but it would be met with resistance and be hard to swallow for many South Africans who already consider themselves overtaxed.
“In a nutshell, I think we’re going to see limited tax increases, but a big increase in spending given all that needs to be done to fix Eskom, our infrastructure and the fallout from Covid-19.” says Rossiter.