Is South Africa ready for strategic tax reforms and infrastructure overhaul?

Zawya

08-04-2025

South Africans have had time to scrutinise the Budget Speech 2025 and its related documents, with diverse responses to key proposals and major decisions. As activities around the speech wind down and the budget documents make their way through Parliamentary processes, it is important to take a step back and consider some of the key macro factors surrounding the budget and how these interplay with the economy, says PwC:
Now, more than ever, we need to focus on creating a more prosperous South Africa. Through our Ubuntu Bethu (Our Humanity) strategy, PwC leverages our community of solvers to build trust and deliver sustained outcomes towards creating a more prosperous country. To this end, we have asked some of our brightest minds to consider how we, as a society, can improve upon some of the pertinent factors influencing the state of the fiscus.
In our new report Responsible growth for a sustainable future, we emphasise the importance of making the right fiscal choices today in the interest of South Africa's tomorrow. Specifically, we look firstly at the broader context of South Africa's tax increase choices, secondly, the levers to improve economic growth and thirdly, the need for climate-resilient infrastructure.
Making the right tax choices
South Africa has seen large fiscal deficits over the past decade, resulting in substantial increases in the public debt burden and the amount of money spent on debt servicing. As such, the National Treasury is in search of ways to shore up its revenues towards reducing the fiscal deficit today and, over time, reduce its debt burden.
In the Budget Speech 2025, the finance minister proposed that value-added tax (VAT) increase by 0.5 percentage points to 15.5% on 1 May 2025 and another 0.5 percentage points in April 2026. It is estimated by the National Treasury that this could generate R43bn in additional fiscal revenues over the next two financial years.
We believe that there are other options available for the National Treasury to also consider as it looks for additional tax revenues. One option would be to invest in narrowing the tax gap (the difference between taxes owed and taxes collected), currently estimated at between R400bn and R450bn.
Kyle Mandy, PwC Africa Technical and Tax Policy Leader, says: 'While it is unrealistic to expect that there would be no tax gap in South Africa, a gap of around 20% of theoretical revenues is high. If the country's tax gap could be narrowed by only 10% in 2025/2026, that would give rise to an additional R40bn to R45bn in revenue and would remove the need for VAT increases.'
Another option is revising the Southern African Customs Union (SACU) revenue sharing formula, which in 2025/2026 will see R73.5bn paid over to some of our neighbouring countries. The SACU agreement provides for duty-free trade between Botswana, Eswatini, Lesotho, Namibia and South Africa.
In 2025/2026, the cost to South Africa of this deal—in the form of revenues foregone relating to domestic consumption of dutiable goods—is estimated by the National Treasury at R73.5bn. This foregone revenue must be weighed up against the benefits to South Africa of having duty-free access to its neighbouring markets; exports by South Africa to the SACU economies amounts to around R200bn annually.
Accelerating economic growth to create more tax revenues
Plans around VAT increases, the size of the tax gap and adjusting the SACU revenue sharing formula might be less of a focal point if South Africa's economy was growing at a healthier pace. Real GDP growth measured only 0.6% in 2024, down from an already meagre 0.7% in the preceding year. Meanwhile, population growth exceeds 1.0% per annum. As a result, the country's real GDP per capita has now been declining for the better part of a decade.
There is a close relationship between nominal economic growth and tax revenue growth, with a long-term average of 1:1. So, if we can get the economic levers right, we can help improve the course of the fiscal ship.
One of the ways that South Africa's economy can grow faster is through productivity gains. We know what the levers are that need to be pulled to accelerate South Africa's productivity and economic growth, with energy, logistics and infrastructure being some of the main ones.
Lullu Krugel, PwC South Africa Chief Economist, says: 'South Africa's private sector has in recent years forged strong co-operative relationships with the government in support of enabling key reforms in critical bottlenecks for economic growth. Work in energy, transport and logistics, and crime and corruption have had some positive results, though as the meagre economic growth numbers for 2023–2024 shows, more work still needs to be done.'
Investing in climate-resilient infrastructure
Budget Review 2025 announced that, over the next three years, R1tn will be spent on public infrastructure. This is a massive investment in physical capital—a key contributor to economic productivity.
However, frequent references in Budget Review 2025 to infrastructure spending are not accompanied by discussions about the impact of climate and weather on infrastructure. This is because, while South Africa wants to increase funding for climate-resilient infrastructure, the fiscus cannot afford to financially support the amount of investment that is required.
Chantal van der Watt, PwC South Africa Director for Sustainability, adds: 'Climate-resilient infrastructure includes the design, construction and maintenance of infrastructure systems that can withstand and adapt to the impacts of climate change.
"With extreme weather events becoming more frequent and more severe, South Africa needs roads that can handle heavier rains, bridges that can withstand the torrent of more severe flooding in rivers, and power grids that do not buckle under increasingly stronger winds.'
There are, however, some considerations that could improve traditional infrastructure delivery processes to increase the climate resilience of fixed capital, while keeping in mind that financing falls short. These include:
• Incorporate climate risk assessments into project planning: South Africa's Environmental Impact Assessment (EIA) already has stringent requirements for infrastructure projects to include climate-change assessments. Adding climate-risk assessments during the planning phase helps identify how risks may evolve over time, guiding the design to account for material risks.
• Nature-based solutions: Human-made infrastructure interacts with natural processes, and nature can protect against extreme weather events. Wetlands and mangroves, for example, can absorb floodwaters and provide natural barriers, benefiting infrastructure and local communities.
• Community engagement: South Africa's public participation process in EIAs often focuses on impacts rather than gathering insights for resilient infrastructure design. Local knowledge of extreme weather events can be invaluable, and involving communities can enhance volunteer efforts in maintaining natural defences.
• Updating building codes and standards: Building codes need adjustments to address climate-change realities, with more frequent and severe weather conditions. Engineers must design buildings to withstand increased heat, moisture and wind, balancing climate and financial challenges within funding constraints.
• Attracting private-sector investment: The Budget Review 2025 emphasises the need for higher capital investment and private-sector participation in public infrastructure. Private investment is crucial for communities needing infrastructure but lacking government funds, helping manage risks like supply-chain disruptions.
All rights reserved. © 2022. Bizcommunity.com Provided by SyndiGate Media Inc. (Syndigate.info).