The June 2009 Treasury tax revenue tables reflect signs of the weakened state of the South African economy.  VAT returns for the second quarter of this year are down 30% from the same period last year indicating a decline in sales, another sign of the recession which we are experiencing.

Not only is VAT down, but corporate tax collections are also lower by some 15% indicating lower taxable earnings. By contrast, tax collected from private individuals is up 9% in spite of current unemployment which might indicate the effects of continued wage increases.

These lower tax revenues are also below the current year’s budgeted collection rate. Only 19% of the expected 25% of receipts had been noted after the first quarter of the government’s financial year. This, together with the fact that government spending has continued at expected levels, has resulted in an actual deficit after the fiscal year’s first quarter of R60bn compared with a budgeted deficit of R95bn for the entire year.

 This also substantiates concerns that, if government spending continues at budgeted levels, the actual deficit for the current year will be markedly higher than expected. This implies that the state may need to issue more bonds to fund the higher-than-expected deficit. In order not to flood the market with new issuance, the government would need to accelerate deferring the maturing of bonds expected to close out this year by convincing investors to swap to longer dated bonds or reducing its own R100bn cash holdings.

Current tax receipts show not only declining consumer spending and corporate earnings but they also point to the need for government to borrow more in the year ahead. This might lead to higher long-term interest rates having to be offered by the government on their new bond issues to make them attractive, but it would not affect short term rates.