KPMG - A Tale of Two Macro-variables, GDP and Ta x Revenue - Muziwethu Mathema, Senior Economist RSS KPMG - A Tale of Two Macro-variables, GDP and Ta x Revenue - Muziwethu Mathema, Senior Economist2015-12-15 Well it's that time of the year again, the end of the calendar year is upon us, which means we are just two months away from the Treasury's budget statement to give guidance and present the case of the republic's fiscal policy for the next three years. As has become tradition, in the run up to the Budget Review most business articles will be awash with various nail biting views and wish lists directed to Honourable Minister of Finance, Mr Nhanhla Nene. So what can we expect from the Treasury? Well, before I begin I have decided to turn my focus on the timeless wisdom of the Beatles (who else?).
If a Beatle can sing about raising taxes then best believe tax is a pretty serious issue. So let's begin. Firstly, it's important to emphasize that a key indicator of sustainable public finance and debt management lies in the ability of the state to generate adequate revenues to meet its expenditure obligations as well as service its principal debt and interest due. Secondly, in macroeconomic terms, economic growth is a major determinant of tax revenue. The higher the GDP, the larger the tax base, the higher the tax revenue. South Africa's post 2008 economic performance has been characterised by flagging domestic demand, weak demand from traditional export partners, labour unrest, inadequate electricity supply and falling output in key sectors. This has increasingly impeded on the tax system's ability to generate adequate revenue. The sequencing of tax revenue performance is heavily dependent on GDP performance. The graph above highlights the historic relation between nominal GDP growth and nominal tax revenue growth. In South Africa 80 per cent of all revenues is generated through a relatively buoyant tax system, the remainder of revenue is generated from non-tax revenue which comprises mineral royalties, mining leases, departmental revenue and sales of capital assets by the state. Tax buoyancy measures the response of the tax system to changes in national income or GDP. The figure below highlights historic tax buoyancy in South Africa. The tax revenue/GDP multiplier or buoyancy of our tax system is a much welcome characteristic. It means that whilst revenues generated from the tax system move in tandem with the economy, on average the growth in tax revenues will be higher than economic growth-in fact revenue has only ever grown slower than the economy in the 2008/09 fiscal year as a result of the global recession. Since then buoyancy has averaged 1.2, which means a 10 per cent growth in nominal GDP will result in a 12 per cent growth in tax revenues. However, as intuitively highlighted in the chart below revenue buoyancy fluctuates around the economic cycle. In "the best of times" when the tax base is expanding we see higher buoyancy and higher revenues, consequently, the same intuition is true vice versa "in the worst of times" a shrinking tax base will yield lower tax buoyancy and lower variables. Tax buoyancy can also experience short-term spikes in periods where the state increases tax or chooses not to give personal income tax relief. Coincidentally, 2015/16 was marked by an upward increase in personal income taxes; lower that inflation tax relief and upward adjustment in fuel related taxes. Contact: 060 980 425 www.kpmg.com |
KPMG - A Tale of Two Macro-variables, GDP and Ta x Revenue - Muziwethu Mathema, Senior Economist
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