Closing the fiscal deficit in South Africa: challenges and solutions to the current taxation framework.

Abstract

South Africa faces persistent fiscal challenges, primarily driven by a widening budget deficit, inefficient revenue collection, and increasing public debt, exacerbated by global economic crises and the COVID-19 pandemic. Despite efforts to reduce debt-to-GDP ratios in the past, discretionary fiscal decisions and limited infrastructure investment have worsened fiscal imbalances. Debt servicing now consumes a significant portion of the national budget, surpassing allocations for education, health, and social protection, thereby hindering economic growth and public service delivery. Structural inefficiencies in the tax system, coupled with governance issues and a rising public sector wage bill, contribute to revenue shortfalls, in addition to corporate tax and VAT underperformance. This study investigated the relationship between fiscal deficits and revenue collection in South Africa, identifying the factors that result in insufficient revenue generation in South Africa. By focusing on strategies to bridge the deficit, the research aimed to inform policymaking, strengthen South Africa’s fiscal health, and support sustainable economic development, while addressing global and regional fiscal trends. This study adopted a quantitative research design, leveraging measurable data and statistical techniques to analyse the relationship between fiscal deficit and revenue collection in South Africa. In particular, ordinary least squares and robust regression were used to determine the relationship. The study integrated systematic literature reviews to identify the factors resulting in insufficient revenue generation in South Africa. Secondary data from credible sources like the South African Reserve Bank, South African Revenue Services, National Treasury, World Bank, OECD, IMF, Google Scholar, Scimago, and other international organisations, were analysed to ensure validity and reliability. Construct validity was established through theoretical alignment and empirical testing, while data were presented via clear statistical methods, including meta-analyses for consistency. The findings reveal a persistent fiscal deficit averaging 4.4% of GDP, underpinned by stable but limited tax revenue at 25.1% of GDP. A weak correlation between tax revenue and fiscal balance underscores the greater influence of government expenditure efficiency and macroeconomic conditions on fiscal sustainability. Effective tax administration is impeded by issues like corporate tax avoidance, corruption, and difficulties in regulating the informal and digital economies. Key obstacles are outdated tax laws, institutional inefficiencies, and high informality. Digital transformation presents opportunities to enhance compliance and broaden the tax base, but these require supportive governance reforms and international collaboration. Anti-corruption measures, simplified tax systems, and targeted strategies for taxing digital services are crucial for sustainable revenue generation. Addressing illicit trade, particularly in tobacco, demands coordinated inter-agency efforts. Recommendations emphasize improving expenditure efficiency, diversifying revenue streams through progressive taxes, leveraging digital tools for tax administration and strengthening intergovernmental relations. Future research should explore broader determinants of fiscal balance, governance quality, and the integration of sustainability considerations into tax policies. This multifaceted approach seeks to enhance fiscal stability, equity, and economic growth.