/ 1 November 2019

Tough work ahead to fix the economy

Tough work ahead to fix the economy
(John McCann/M&G)



Finance Minister Tito Mboweni on Wednesday likened the state of the economy to an aloe ferox plant that has gone through a harsh winter season, during which the ground was hard and “leaves fell from the trees and the air was bitterly cold”.

“We stand at the end of winter. The food cupboards are almost bare,” he told Parliament when he delivered the medium-term budget policy statement on Wednesday.

Mboweni considers the South African economy as being at the tail end of winter and at the beginning of spring, during which only hard work, discipline and consistency will result in fertile soil from which a fruitful harvest will emerge.

The South African Revenue Services (Sars) is undergoing its own winter. But sweeping changes to its leadership, including the appointment of commissioner Edward Kieswetter, have sought to reinvigorate the revenue collector into an efficient tax-collection agency.

But after years of increases in tax collections, more revenue from this source is limited. The tax to gross domestic product (GDP) ratio stands at 26.4%, which is at its highest in nearly two decades.

Although the 2019 budget projected R10-billion in tax increases for the 2020-21 financial year, the government forecasts that Sars will undershoot its revenue target by R52.5-billion, collecting only R1.37-trillion instead of its estimated R1.42-trillion.

Gross tax revenue needed to grow 10.4% instead of its 4% decline to reach the 2019 budget estimates. The bulk of the shortfall resulted from weaker-than-expected economic growth, which put a dent in the government’s aim to support employment and welfare.

Treasury predicts that the revenue shortfall trend will continue over the next three years, with Sars expected to have an R84-billion shortfall in 2020-21, ballooning to R144.7-billion in 2021-22. This can be attributed to a poorly performing economy, as well as gaps in the efficiency of Sars’ capacity to collect revenue.

Weaker economic growth, widespread job losses, lower wages and smaller bonuses have also reduced personal income tax collection. Households have reduced consumption, which resulted in moderate value-added tax (VAT) collection. Reduced profitability for businesses in a difficult trading environment has resulted in lower-than-expected corporate income tax.

Nedbank senior economist Nicky Weimar says that the country’s weak economy has affected most business, and that Sars is not an exception in not meeting its targets “A lot of damage has been done at Sars over the last 10 years and reforms would be need to implemented in order to place the revenue collector on a positive trajectory. Additionally, the economy is not growing at all and that is reducing Sars’s ability to widen its taxpayer base,” she said.

Deficiencies in the revenue collection agency, as well as with various corporate governance and organisational failures identified by the Nugent commission of inquiry, have been behind the organisation’s failure to collect revenue efficiently over the Past couple of years. Mboweni says that he intends to table Nugent’s findings in Parliament next year.

“Achieving a more inclusive South Africa relies on honest taxpayers. Without your taxes, South Africa will never succeed. But you have told us that we must spend your hard-earned money better, and we could not agree more,” he said.

At a briefing on Wednesday, Kieswetter said the weak economy had a negative effect on public confidence in the tax agency and that “society tends to think that it is okay to fiddle with their taxes” by not complying with the law. Kieswetter noted, however, that Sars has made significant progress in identifying criminal syndicates that engage in VAT fraud.

“We need to place a huge focus on compliance, investigation and bringing them to book,” he said.

PwC economist Christie Viljoen, who stressed that poor economic performance is hampering the agency’s ability to collect revenue. “Society needs to be encouraged to comply with the law, pay taxes and reduce tax avoidance. The reforms that are currently being implemented by Sars, however, will only bear fruit in the long term,” he said.

Thando Maeko is an Adamela Trust business reporter at the M&G