By Carla Rossouw, head of tax at Allan Gray
Bracket creep hits low- to middle-income earners
It is clear from the 2024 Budget that Finance Minister Enoch Godongwana finds himself between a rock and a hard place ahead of a watershed election in May. His options are limited to achieve stability in the country$B!G(Js finances: Borrow more, raise taxes or cut government expenditure.
It looks like the Minister will pull all these levers in one way or another – although it may not be immediately obvious that this is what he is doing. Rather than borrowing more, Godongwana plans to draw down R150 billion from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to lower the country$B!G(Js debt burden.
To limit the negative impact on economic growth, the 2024 Budget proposals will not increase tax rates in any category other than excise duties.
The primary aim of the tax system is to raise sufficient revenue for government spending. In November 2023, the Medium-Term Budget Policy Statement sounded the alarm on weaker public finances, with both personal income tax (PIT) and corporate income tax (CIT) collections coming under pressure. PIT revenues continue to struggle as a result of high unemployment, retrenchments and salary cuts in response to a weak economy. Any increase in PIT rates would therefore further worsen the current position and further increase the financial burden on households.
CIT windfalls experienced in recent years, particularly owing to price increases in key commodities such as mining and manufacturing, which assisted in managing the books, have also dwindled, resulting in disappointing collections.
While the big tax levers (PIT, CIT and valued added tax or VAT) haven$B!G(Jt been pulled during this election year, additional revenue still needs to come from somewhere. This gap is being addressed with the Minister opting to raise additional PIT by not adjusting the personal income tax brackets (commonly referred to as bracket creep), rebates and medical tax credits for inflation, in addition to above-inflation adjustments to excise duties for alcohol and tobacco. Bracket creep is an effective way to raise revenue as the impact on household income is not immediately evident to the public: the tax brackets remain the same, but if your salary goes up by inflation, you come out poorer.
It was a relief to many that Godongwana stayed away from VAT. In a struggling economy, to increase VAT, as well as not addressing bracket creep, would have been a double whammy. But this does not mean that an increase is off the table.
As in the 2023 Budget, the government again proposes no changes to the general fuel levy and Road Accident Fund levy to reduce pressure on households and businesses.
Policy reforms underway
Two longer$B!>(Jterm policy reforms are in the final stages of refinement before coming into effect, namely the two$B!>(Jpot retirement reform and international corporate tax reform.
Two-pot retirement reform is being implemented through amendments contained in the Revenue Laws Amendment Bill and the Pension Fund Amendment Bill, both currently before Parliament, and it is estimated that R5bn is likely to be raised in 2024/25 due to tax collected as fund members access once$B!>(Joff withdrawals.
The introduction of global minimum tax rules, in line with the Organisation for Economic Co$B!>(Joperation and Development$B!G(Js base erosion and profit$B!>(Jshifting framework, is expected to increase corporate tax collection by R8 billion in 2026/27. The Explanatory Memorandum and Draft Global Minimum Tax Bill will contain more details on these proposals, as well as a request for public input. While these reforms will not yield immediate revenue, they may alleviate some revenue pressures once implemented.
SARS to the rescue
The Minister has once again placed great responsibility on SARS to enhance its administrative and enforcement capabilities to strengthen revenue collections. This is evident from SARS$B!G(Js efforts to embrace technology in the form of digitising or modernising the tax system. This comes as no surprise as South Africa continues to battle with a significant tax gap (the difference between what should be paid and what is actually paid).
While there was no mention of a wealth tax, the focus on high-net-worth (HNW) individuals remains. Taxpayers with business interests are required to declare their assets and liabilities (at cost) in their tax returns each year and those with assets above R50 million, are further required to declare specified assets at market values on their tax returns. Further to this, trusts have also recently been added to SARS$B!G(Js watchlist, as these vehicles are commonly used by HNW individuals to accumulate wealth in a tax-efficient manner.
Government spending pressures
The upward trajectory of government spending remains a concern, particularly regarding the public sector wage bill, which remains government$B!G(Js biggest expenditure, the country$B!G(Js exorbitant debt-servicing cost (the fastest-growing item of state expenditure) and additional spending pressures associated with state owned enterprises (specifically Eskom and Transnet). The Minister announced that further measures will be implemented to rein in government spending and expedite structural reforms, but the results will not be visible immediately and will take time to deliver.
The Social Relief of Distress grant has been extended to 1 March 2025 at a cost of R33.6bn. To keep pace with inflation and increase access, permanent social grants are also being increased. In addition, a R1.4bn allocation has also been made towards the National Health Insurance (NHI) allocation to fund a wide range of $B!H(Jsystem-strengthening activities$B!I(J, that are key enablers of an improved public health care system, acknowledging that further development is required before it can be rolled out at scale.
Seeking a sustainable solution
Whether the objectives as set out in the Budget are achievable, will be determined by government$B!G(Js political will to anchor expenditure and put resources to better use, which is fit for purpose to yield real results. What this country needs most is sustainable economic growth – increasing taxes is one way to fund the tax shortfall but there is no substitute for growing the economy and creating jobs.
Read also:
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In full: Finance Minister Enoch Godongwana’s budget speech
South Africa to tap Gold, currency reserves to curb runaway debt
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