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SA digs into reserves to service debt

‘Revenue shortfall mainly due to large decrease in tax on profits of mining’

Koena Mashale Journalist
Finance minister Enoch Godongwana during his 2024 budget speech in Cape Town.
Finance minister Enoch Godongwana during his 2024 budget speech in Cape Town.
Image: GCIS

SA’s state of public finances is so precarious that the country has had to dig into its reserves to finance the servicing of its debt.

Finance minister Enoch Godongwana announced on Wednesday during the budget speech that the government would dip into the special Gold and Foreign Exchange Contingency Reserve Account (GFECRA).

The account is managed by the SA Reserve Bank and keeps profits and losses of foreign currency reserve transactions.  The move came as a result of what Godongwana said was lower-than-expected tax revenue.

He said at R1.73 trillion, tax revenue for 2023/24 is R56.1bn lower than estimated in the 2023 budget. “Simply put, if the rand strengthens against the US dollar and other reserve currencies, the account balance declines, and vice-versa. The account balance has grown to over R500bn over the years because the rand has depreciated over time.

“We will draw down R150bn of the GFECRA balance once we have ensured that sufficient buffers are available to absorb exchange rate swings and the solvency of the Reserve Bank is not compromised,” said Godongwana.

He said the higher budget deficit means that debt-service costs in 2023/24 have been revised higher, by R15.7bn to R356bn.

“Debt-service costs will absorb more than 20% of revenue. To put this into perspective, spending on debt-service costs is greater than the respective budgets of social protection, health, or peace and security,” Godongwana said.

He said the shortfall in tax collection was largely due to the decline in corporate profits and revenue from taxes on mining.

Economist and public finance expert Dr Seán Muller said a sluggish economy and various other underlying factors, including global commodity prices and export issues, have led to the decrease in mining profits.  

“The shortfall is mainly due to a large decrease in tax on profits of mining companies, which in turn is a result of decreases in global commodity prices and perhaps some constraints on exports from logistics challenges. Another source of the shortfall is VAT refunds for investment in decentralised energy generation, but the Treasury has not quantified that amount,” said Muller.

“The revenue shortfall does place greater pressure on the fiscal strategy. If there was no response, either borrowing would need to increase or expenditure to decrease."

Muller said there is much debate about alternatives for raising revenue. “In 2018, the Davis Tax Committee investigated the possibility of a wealth tax and concluded that a significant amount could be raised from such tax provided it was well-designed.

“The National Treasury has taken some steps in that direction but unfortunately not fast enough. The tax rate on corporate profits was recently, and unnecessarily, lowered from 28% to 27% at a time when arguably greater social solidarity is needed.

“It is important to remember that tax is only on profits and there are many companies with their revenue bases in SA that would not relocate operations elsewhere. Unfortunately, Treasury has chosen to pander to lobbying from large companies and wealthy individuals to focus its revenue-raising measures on ordinary citizens.”

University of Johannesburg economic expert Peter Baur said the country's taxes have been decreasing since 2020. “Between last year and now, the actual total taxable income declined because of the lack of economic growth that we have been experiencing and this has hit a lot of industries, like your mining, and this just means that the commodities are not doing as good as they used to.”

Baur said there are a number of ways the government could expand its tax pool and one of them is to increase business tax.

Godongwana said multinational corporations with annual revenue exceeding €750m will be subject to an effective tax rate of at least 15%, regardless of where their profits are generated.

“But company tax is a little bit of a concern as well related to how foreign investors will perceive SA if they want to bring their businesses here. So, if company tax is under pressure, then foreign investors may sort of like compare us with other investment destinations,” Baur said.


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