Positive Budget, but it Rests on Narrow Tax Base

Yesterday’s budget was broadly welcomed, with government signalling a continued commitment to fiscal discipline. Yet beneath the headline numbers lies a structural vulnerability that cannot be ignored.

This vulnerability is South Africa’s relatively narrow tax base, with a large chunk of total government revenue funded by a relatively small number of people.

• South Africa has about 62 million people.
• Roughly 28 million receive some form of social grant.
• About 17 million are working.
• Only around 7.1 million earn above the threshold to be registered for income tax.
• Around 1.6 million people earning more than R500 000 per year contribute 74% of all personal income tax (PIT).

Approximately 800 000 individuals (about 1.2% of the population) earning above R750 000 annually account for 56.7% of all PIT paid.

The South African Revenue Service collected about R1.9 trillion in total revenue in the last tax year, with PIT contributing around 34.5% of that total (VAT contributed a further third and company and other taxes the balance).

The 800 000 taxpayers earning more than R750 000 accounted, through the tax they directly paid, for roughly 20% of all government tax revenue. But those same people run the companies that pay corporate tax and drive the commerce and pay the wages that makes VAT receipts possible. In effect therefore, that 1.2% enables the balance of state revenue.

There is a further pressure point. Of the 7 million taxpayers above the income threshold, 1.7 million are older than 55, representing about 20% of taxpayers, compared to roughly 13% of the national population. This older cohort contributes about 27% of all assessed tax paid.

South Africa’s tax-to-GDP ratio is also high relative to many emerging markets, sitting in the mid-to-high 20% range, broadly comparable to far wealthier economies but without the growth, employment base, or service efficiency to sustain it.

A narrow and ageing tax base leaves little room for policy error. Alienate the 1.2% via expropriation policy or NHI and revenue collapses. In a low-growth economy with a rickety debt burden, the sustainability of public finances depends not on squeezing a shrinking minority harder, but on expanding the base through growth and job creation.