This column was first published in Business Report.
What a difference a year makes.
Our economy is still in serious trouble and we face significant hurdles in getting it onto a strong, sustainable growth path, but at one stage last year when things were really bleak, economists and Treasury itself were pencilling a tax revenue shortfall for the state of as high as R300bn.
Because we entered the pandemic with a rather barren war chest, borrowings and more borrowings were tabled as the only course for the state to meet its increased obligations in the face of a crisis that no modern-day government had faced.
That was quite a time. Yet today we are buoyed by news that the South African Revenue Service managed to exceed revised budgets for tax collections, collecting R38bn more than had been estimated in the February budget for 2020/21.
Strong growth in commodity prices have fed into higher profitability for our long-troubled miners, who have contributed to better than expected tax receipts. No one could have imagined then, as countries across the world shut their economies, that global commodity markets would enter a strong bull run, supported by demand from Asia and China in particular, as well as a generalised infrastructure investment response to the crisis . This has underpinned the rand’s strengthening against the dollar by more than 20% from its April 2020 lows. The extra tax revenue means the state has just that little more breathing room to get its debt levels under control.
While this provides a welcome reprieve and a nice break from all the negative economic data that we’ve become accustomed to over the past few years, the tax collection figure is a massive R106bn less than what was collected last year. Still, one has to appreciate that it’s far better than the collapse in revenue that was first envisioned.
Income tax payments
Mining, a cornerstone of the South African economy since copper was first mined in the Northern Cape in 1850, has softened the blow of Covid-19. Consumer-facing industries continue to struggle. Banks and the other finance-related sectors saw a 15.3% reduction in income tax payments as profits collapsed, while manufacturing also fell 16% and community social and personal services fell 28.7%.
Provisional income tax by the mining sector was 57% higher than the year before, which makes me wonder just how much more could the mining industry have bolstered our fiscal position had the state undertaken more of the structural reforms miners have long lobbied for. For what seems an eternity, the Minerals Council South Africa has called for policy certainty, and in particular security of tenure for long-term investment in the mining sector to be re-ignited.
The industry, that makes up about 7% of the country’s gross domestic product ( and much more if you add in downstream impacts) and employs more than 450,000 people, has called for a stable, predictable policy, regulatory and operating environment, which is needed for investment to thrive. There is a need to streamline regulation and procedures and to remove red tape.
Just imagine how much better it could have been if policy for attracting investment into the mining sector worked better than it does now. Imagine if the 5,000 mining rights applications awaiting approval at the department of mineral resources and energy had been processed on time. Imagine if long-outstanding revisions to mining legislation and the mining charter had been finalised. The mining sector would have been much bigger than it is and the tax collections therefore even bigger and the future burden on taxpayers much less.
With the immediate focus on a successful vaccination programme and rebuilding the economy, we should not become complacent about the urgent need for structural reforms. They form a key component of President Cyril Ramaphosa’s Economic Reconstruction and Recovery Plan that was endorsed by both business and labour last October.
These structural reforms create a conducive environment for businesses across the spectrum, strengthening an advantage that South Africa has over many other emerging market countries: a diverse economy that comes to the fore when “black swan” events such as the Covid-19 pandemic occur. Were conditions even better for the mining sector, our rebound would have been much stronger and, more importantly, our recovery quicker.
We need to get small and big businesses in South Africa working better by opening the energy market and finalising the auction of spectrum so that network providers can invest in expanding capacity and increasing broadband availability.
Structural reforms are our best defence against global market events that we can’t influence. While the current boom in mining is welcome, we would do well to remember it is a cyclical industry.