An Estimation of the Effect of Tax Revenue Collection on Public Debt in South Africa

Abstract

Public debt is one of the most important economic indicators in such a way that if it is unsustainable, higher interest costs would be realized which could negatively affect significant public investments that ensure economic growth. Developing economies including South Africa, are known to be having unsustainable public debt levels coupled with poor economic growth. Irrespective of governments’ measures to service the public debt, like selling enough treasury bonds, the taxpayers end up carrying the burden of the debt. The South African government has not been able to generate enough revenue to finance its financial obligations (capital and current expenditures and public debt). National Treasury (2019) indicates that South African public debt averaged around 62.2 percent of the Gross Domestic Product (GDP), while tax revenue collection averaged around 26.4 percent of the GDP. This implies that the South African public debt is unsustainable as 62.2 percent is greater than the World Bank benchmark of 60 percent of the GDP. Furthermore, 26.4 percent of tax revenue collection to GDP is less than half of level public debt; which infers that the generated tax revenue collection is insufficient to service at least half of the level of public debt. This is because of the fact that the South African economy has barely grown in the past decade due to fiscal missteps and corruption. Hence, the main objective of this study is to estimate the empirical effect of tax revenue collection on public debt in South Africa. To fulfil the proposed objectives of this study, econometric techniques such as Auto Regressive Distributed Lags (ARDL) and Nonlinear Auto Regressive Distributed Lags (NARDL) are used in this study. Furthermore, to suit the objectives of this study, variables such as tax revenue collection, political instability and corruption are selected as independent variables when public debt is selected as the dependent variable. Yearly time series data of the aforementioned variables for the period 1985 to 2019, is used in this study. This study is unique in the sense that it is the first to explore the empirical relationship between tax revenue collection, political instability, corruption and public debt in South Africa. Furthermore, this study is the first to test for possible asymmetric (nonlinear) relationship between tax revenue collection, political instability, corruption and public debt in South Africa, using the NARDL technique.

This study finds long and short run negative relationship between the South African tax revenue collection (symmetric relationships). Furthermore, long run positive and negative shocks of political instability and corruption affect the South African public debt positively and negatively (asymmetric) respectively, and these shocks are statistically significant. In the short run, a positive relationship between political instability, corruption and public debt is established in this study (symmetric relationships). Only the short run relationship between corruption and public debt is statistically significant. This study also finds that changes in public debt are affected by changes in tax revenue collection and an increase as well as a decrease in political instability and corruption respectively. Moreover, changes in tax revenue collection are affected by an increase in corruption, and an increase and the decrease in political instability. The noteworthy implication raised by the results of this study is that if South Africa desires to reduce its public debt, then it must improve its tax revenue collection in both the long and short run. Hence, this study recommends that government ought to re-channel its expenditure programmes by identifying sectors that are more productive (productive expenditures), and invest in them as government would be able to recoup the resources, and consequently generate more income which would possibly be in taxes and/or net received receipts; hence discouraging inclination to borrow. This study further recommends an elimination of political patronage, coupled with the re-adoption of clear and strict ethical standards that show clear and harsh consequences for the perpetrators found to be involved in corruption. Hence, increasing accountability within the public governance.