The ‘hidden’ tax cost of cutting the public wage bill

The Parliamentary Budget Office (PBO) has published its analysis of finance minister Tito Mboweni’s Medium Term Budget Policy Statement (MTBPS) and some of its tax implications.

The PBO provides independent, objective and professional advice and analysis to parliament on matters related to the budget and other money bills.

In a presentation to parliament on Tuesday (3 November), the PBO noted that the MTBPS calls for additional tax measures amounting to R40 billion over the medium-term.

Mboweni said that these increases will help with ‘consolidation’ of the country’s finances, alongside a range of spending cuts.

“The impact of the Covid-19 economic contraction on South Africa’s public finances will be felt for years to come.

“Although the economy has begun to recover from the hard lockdown, tax revenue in the current year is projected to be R8.7 billion lower than the June estimate,” the minister said.

Additional fiscal pressures from the broader public sector – including state-owned companies, social security funds and municipalities – remain unresolved, he said.

“The fiscal trajectory is a major source of uncertainty, pushing up borrowing costs for the broader economy.” To assist with the consolidation, government has projected tax increases of R5 billion in 2021/22.

This will be followed by increases of R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25.

However, the PBO said some policy proposals in the MTBPS may worsen tax revenue collection if implemented – for example, the impact on Personal Income Tax (PIT) and VAT due to the reduction in the public sector wage bill.

Wage freeze

Mboweni said that National Treasury will propose a three-year wage freeze in an effort to stabilise the spiralling public sector wage bill.

About R36.5 billion has been reduced from the compensation of employees, mainly from a freeze in salary increases, he said.

The PBO noted, however, that public sector workers account for a relatively larger portion of PIT base because:

  • They comprise a larger share of the workforce;
  • Their earnings tend to be higher than their counterparts in the private sector.

Consequently, the PIT tax base is potentially more sensitive to public sector pay policy decisions or level of employment.

“In times of public spending growth, it is generally recognized that public sector tends to offer greater job security than the private sector, yielding a steady stream of PIT revenue,” the PBO said.

“However, in times of austerity, the tendency to impose policies directly aimed at reducing the public sector workforce size or capping pay can have a disproportionate effect on the PIT tax base.”

It added that a number of non-policy factors, related to the lockdown, are expected to reduce revenue collections in the coming year. These include:

  • Reduction in consumption;
  • Excessive corporate profitability during the lockdown;
  • Loss of jobs due to economic lockdown expected to adversely to affect PIT collection.

Read: SA consumers are borrowing money to pay back their debt

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