More blackouts, fewer jobs, less tax revenue

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When will government recognise that Eskom’s crisis is South Africa’s crisis?

It is shocking that the South African government seems not to regard the now regular power blackouts lasting four hours at a time as the single biggest risk to South Africa’s economic growth and to its relatively stable young democracy.

This can only exacerbate the existing lack of economic growth, and this may soon undermine the government’s social agenda and the country’s economic stability. Both are extremely important in enabling the government to redress the legacy of apartheid and prepare South Africa for a prosperous future.

 

According to the Council for Scientific and Industrial Research (CSIR), there was more loadshedding in September 2022 alone than during the entire twelve months of 2020.  Considering that loadshedding has escalated since then and that during December 2022 we experienced regular Stage 5 and Stage 6 of loadshedding, it is reasonable to conclude that it is at unprecedented record levels.

Economists estimate the damage to the economy at over R4 billion a day, and that growth to South Africa’s economy may have been stunted by about 10%.

According to the Sakeliga member survey, most of the businesses surveyed stated that blackouts came with notable estimated losses in revenue and damage to property.  The repair costs will either be absorbed by the businesses, or will translate to higher insurance costs—or, if not repaired, will have detrimental effects on productivity.

Based on economists’ views, various business organisations, and surveys conducted, it is obvious—at least to us, and perhaps some people in government (though it may not appear so)—that damage to government revenue must be reaching unprecedented, elevated levels since the dawn of democracy.

This is exacerbated by the fact that it is the SMME sector, which provides jobs in the informal sector, which is suffering the most.  A number of these small businesses may have to close—which will lead to an increase in the unemployment rate, and this will put additional pressure on government coffers.

There are also job losses in the formal sector, which will have an impact on the collection of all main sources of tax revenues.

 

According to revenue statistics published by National Treasury (NT) and SARS, government revenue is made up of about 89% of tax revenues.  In the 2019/20 fiscal year, these tax revenues consisted of Personal Income Taxes (PIT) at 39%, Corporate Income Taxes (CIT) at 16%, Value Added Tax (VAT) at 26%, Fuel Levies at 6%, and Customs Duties and others at 13%.

Between the 2016/17 and 2020/21 fiscal years, tax revenues have remained stable with an increase or decrease over the five years of only 1%.  This means that in the 2018/19 fiscal year tax revenues were R1.287 trillion, and in 2019/20 they were R1.355 trillion—representing an increase in revenue of only less than 1% (or around -5% in real terms).

An increase of 1% or less in tax revenue should not be acceptable in a country such as South Africa, where we have many social needs that must be addressed.  Where will the government find money to pay for the increasing need for quality education, social grants, National Health Insurance, health, and infrastructure?

More tax revenues could be raised from the creation of more jobs.  This will result in more consumer spending and more investment in production capacity which will result in more tax revenues.  These, in turn, should enable the government to increase its investment in infrastructure projects.  All of these would result in real growth in PIT, CIT, and VAT—which constitute over 80% of tax revenues.

 

However, these tax revenues are seriously compromised by Eskom’s inability to provide South Africa with reliable electricity over the past 15 years.  In fact, the government is sabotaging itself in achieving its stated plans for the people of South Africa.

With increases in social unrest, theft of crucial infrastructure such as electricity cables and railway tracks, and recent natural disasters such as floods, it is incomprehensible how the government is failing to see the crisis looming due to the lack of a stable electricity supply.

Short-term gains in increases in fuel levy revenues are not sustainable—as the price of fuel is dependent on many factors that the government cannot control, and the revenue is earmarked for certain expenses such as compensation to victims of road accidents by the Road Accident Fund.

 

It is not rocket science to deduce that more jobs and a growing economy will result in more tax revenue.  This will reduce the need for more government borrowings—which, according to NT, were R500 billion for the 2020/21 fiscal year.

In 2021, NT confirmed that South Africa spends R303 billion annually to service debt and that this expenditure could increase to as much as R1 trillion over the next three years.  This means that South Africa is currently spending over 20 cents (20%) in every rand to service its debt.

To reduce the need for debt, SARS must collect more tax revenues—but its job is made much harder when the economy is not growing at a healthy rate.

 

Government’s solution is to establish a National Energy Crisis Committee to approve the development of electricity by independent power producers, while Eskom continually asks South Africans to reduce the use of electricity—a unique marketing concept devised by Eskom.

Meanwhile, Eskom continually gives us empty promises that they are improving the reliability of their coal fleet.  As we have learned over the years—when it comes to electricity solutions and Eskom, there will be a huge price to pay for South Africans, one way or the other.

While the government’s inaction and Eskom’s inability to manage its coal fleet continues, tax revenues continue to suffer, and South Africa’s coffers are running empty at an alarming rate.

When will the government wake up and realise that this is South Africa’s biggest crisis since 1994—and sort out Eskom inefficiencies for all our sake, and for the future of South Africa?

 

WRITTEN Bernard Mofokeng AND Nico Alberts

Bernard Mofokeng is a partner and head of tax at CMS South Africa.

Nico Alberts is a senior tax consultant at CMS South Africa.

 

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein.  Our material is for informational purposes and should not be construed as financial advice.

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