Why Treasury is suddenly swimming in cash
- New numbers from Treasury have confirmed a strong increase in tax income since December.
- Treasury is now sitting on a remarkably large cash pile.
- Bond 'overissuance' and strong tax income from mining companies have bolstered government finances.
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More evidence is emerging that while South Africa is still struggling with crippling government debt, it has seen a remarkable upswing in tax income.
The latest numbers from National Treasury show that in December – despite closed beaches and a lethal second wave of Covid-19 – government’s tax revenue of almost R176.4 billion was significantly higher than the R160.4 billion earned in the same month in 2019.
Then, Treasury confirmed that at the end of January it was sitting on cash of R378 billion. “Everyone (was) shocked,” says Peter Attard Montalto, head of capital markets research at Intellidex, in a new report.
This was R43 billion more than expected.
The cash pile was partly due to an "overissuance" of government bonds in recent months, Montalto says. There has been a strong appetite for South African bonds, which offer solid interest rates compared to others.
But government also saw "an extreme positive revenue shock (from mining and corporate tax) which may partly (though not totally) be a one-off", he adds.
Large surprise windfalls in mining royalties and corporate tax have surprised significantly to the upside.
Mining income has been bolstered by climbing commodity prices, as global demand recovers, and other corporate tax income has been on the increase as tax holidays – granted during the pandemic – come to an end. Last year, South Africa deferred provisional corporate tax and granted PAYE relief for employers, for example, to help companies cope with the shock of lockdown.
“Year-to-date (government) revenues are therefore down ‘only’ 5.8% versus the previous fiscal year, whilst January revenue appears to be up an astonishing 39% versus a year before,” says Montalto. This is a remarkable recovery. In May last year, for example, revenue was 30% lower than in the previous year.
Last week, Old Mutual estimated that if the current tax trend continues, South Africa is heading for a budget overrun of more than R45 billion by the end of the fiscal year.
The upswing in tax income could mean that instead of Treasury’s expected budget deficit of 14.6%, South Africa may only have a budget deficit of 10.9% at the end of the fiscal year, Intellidex forecasts.
And Montalto now expects Treasury will sit on a cash pile of double its targeted R383 billion by the end of the fiscal year.
“(Treasury) has too much cash even for a risk-averse outlook,” says Montalto.
This should prevent big tax hikes in this month’s budget, and will mean that vaccine costs should be absorbed, and welfare grants could be extended.
“Whatever gets proposed by Treasury can of course then be watered back by cabinet, whilst it is now harder for cabinet to stomach the ‘there is no money’ line from Treasury when you are sitting on double the cash you said you would be.”
Cabinet could push for a stall in deep spending cuts, as well as increases in state wages.
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