South Africa Economic Outlook - October 2023

Fiscal perspectives ahead of the Medium Term Budget Policy Statement

PwC expects a tax revenue shortfall of up to R30bn in 2023/2024 — an improvement over an earlier prognosis (R50bn) following strong Corporate Income Tax (CIT) collections in August

Johannesburg, 26 October 2023 — PwC South Africa is pleased to share its tenth South Africa Economic Outlook report for 2023.

This edition provides some perspectives on the country’s fiscal situation ahead of the Medium Term Budget Policy Statement (MTBPS), set to be released on 1 November 2023. South Africa’s fiscal environment has deteriorated since the publication of Budget 2023 (in February this year), with the last number of months seeing increased concern over the expected shortfall in government revenues during 2023/2024 alongside a deteriorated macroeconomic situation. However, the fiscal picture is not as dire as initially expected.

Kyle Mandy, PwC South Africa Tax Policy Leader, says:

“We expect a total tax revenue shortfall of up to R30bn in 2023/2024. That is a significant improvement over an earlier prognosis — around R50bn — following strong collections of Corporate Income Tax (CIT) during August. The month of August is an important one for understanding the CIT landscape as it includes the first provisional tax payments for companies with February year-ends. Furthermore, collections of Personal Income Tax (PIT) are holding up well, and will likely be around R10bn above Budget 2023 estimates, on the back of stronger-than-expected job creation and wage growth.”

There are certainly some good news items from a CIT perspective. We now forecast a shortfall of approximately R10bn in CIT collections compared to what the National Treasury planned for in Budget 2023. While CIT collections have dropped by 15.1% y-o-y in the first five months (April-August) of 2023/2024, this is a smaller margin than previously calculated (-21.7% y-o-y) when data was available up until July. August’s CIT collections were 10.4% y-o-y higher. Generally, August is an important month for CIT collections due to companies with February year-ends making their first provisional tax payments. Note, however, that only two months of the fiscal year so far have been significant months for CIT collections, posing high risks to projections.

At a sectoral level, PwC’s SA Major Banks Analysis September 2023 found that the country’s four largest banks (Standard Bank, Absa, FirstRand, and Nedbank) paid R18.6bn in direct taxes in 2023H1, which was on par with the values seen in 2022H2 and 2022H1. In contrast, mining companies are contributing less tax following the end to the commodity boom experienced in 2021 and 2022H1.

On a positive note, PwC forecasts that PIT collections will actually exceed budgeted figures by around R10bn, with PIT growing at 8.0% y-o-y in the fiscal year so far against a budgeted increase of 6.7%. Domestic Value-Added Tax (VAT) collections are holding up surprisingly well, despite consumers being under pressure. Collections saw an increase of 6.5% y-o-y in 2023/2024 so far compared to a forecast growth rate of 7.5%.

The expected R30bn total tax gap will result in a tax buoyancy reading of around 0.84. This will be the lowest reading since the global financial crisis. Tax buoyancy measures the responsiveness of taxes to growth in the economy. A reading below 1 indicates that tax revenue growth is lower than nominal GDP growth. This, in turn, is often associated with a weak economic and company profit environment.

Public sector expenditure is at the core of economic development and socio-economic upliftment. In addition, public services provide the basic hard and soft infrastructure needed by the private sector to grow their business and employment. These are key reasons why an expected shortfall in fiscal revenue during 2023/2024 is bad news for the South African economy.

Lullu Krugel, PwC South Africa Chief Economist, says:

“Budget 2023 expected the South African economy to grow by 0.9% this year and 1.5% in 2024. At present, we forecast lower growth rates of 0.5% and 1.1%, respectively. This is indicative of the multiple headwinds faced by the local economy, including a weak outlook for household finances (linked to a decline in real income) impacting household spending, low business confidence weighing on investment, a decline in global commodity prices reducing export receipts, and a weak rand increasing the cost of imports.”

The MTPBS 2023 needs to update fiscal revenue, expenditure and debt forecasts, and specifically comment on how the 2023/2024 funding gap will be addressed. The finance minister has indicated that spending cuts and increased borrowing (not higher taxes) can be expected. PwC also anticipates that the minister will place greater responsibility on the South African Revenue Service (SARS) to improve compliance levels to bolster fiscal income over the medium-term.

The country’s tax gap (the difference between taxes legally owed and taxes collected) is currently estimated to be more than R300bn. Reducing this by 10% would fund the tax shortfall of R30bn that we have forecast for 2023/2024. The revenue authority has made progress in this regard: SARS Deputy Commissioner Johnstone Makhubu has noted that compliance efforts contributed R82bn to revenues in the first five months of the year, up 22% y-o-y.

Key content in this report includes:

• Global context: Many African countries experienced increased fiscal pressures over the past six months.
• Local macroeconomic trends: The changing economic outlook from Budget 2023 to MTBPS 2023.
• Fiscal revenue shortfall: Likely smaller than initially expected after improved corporate tax collections in August.
• Narrowing the funding gap: Banking on improved tax compliance to improve the medium-term fiscal outlook.
• In the context of a constrained fiscus, a new public-private collaboration model (which PwC helped develop and implement) that allows South African businesses to support the delivery of key public services to their communities.

On 1 November, PwC will be issuing a post-MTBPS comment. Our economists will also be available for media interviews.