Budget challenges III: Revenue and expenditure
18 February 2019
INTRODUCTION
The starting point for a discussion of Budget revenue and expenditure options is the October 2018 Medium Term Budget Policy Statement, covering the fiscal years from 2018/19 to 2021/22. Salient features of the MTBPS are presented in the Appendix, from which a number of points can be made. Line numbers in the text refer to the Appendix.
Low growth[1]. The MTBPS projects real annual growth of 0.9% per annum from 2018 to 2021. The IMF projects it a 0.1%. In current prices, GDP growth between 2018/19 and 2021/22 rises by 7.6% per annum in the MTBPS and 7.1% according to the IMF.
In order to attract investments and ignite growth, the IMF advocates structural reforms through increased competition in product markets, greater labour market flexibility, addressing skill shortages, tackling corruption and leveraging digitization. But the likelihood of major structural reforms in an election year is unlikely.[2]
Also highlighted was the need for greater policy certainty.[3] According to the IMF, corruption has consistently ranked as one of the top factors deterring investment, and that proper implementation of the Public Finance Management Act would prove a substantial deterrence against corruption.[4] Studies show that a 10 point improvement in a country’s corruption perception index can increase GDP growth per capita by around 1 percent. South Africa’s currently scores 43 – just below the word average of 44.3.[5]
Taxation[6]. Aggregate taxation is projected to rise by 8.3% per annum over the MTBPS, faster than nominal GDP. The highest increases are in personal income taxes and VAT. We expect that there will again only be partial adjustment of income tax rates to counteract bracket creep this year. The VAT projection implies another rate increase by 2021/22, but given the furore over the VAT rate increase last year and the coming election, we do not expect a rate increase this year. Equally, we do not expect a cut in the VAT rate, though an expansion of zero-rated goods will be a possible sop. The government dare not raise the corporate income tax rate while the economy remains weak, and growth from this revenue source is projected to grow more slowly than nominal GDP.
Revenue collection has declined over the past four years. Higher than expected VAT refunds has caused tax revenue projections to be revised down by R27.4 billion in 2018/19, R24.7 billion in 2019/20 and R33 billion in 2020/21 relative to the 2018 Budget. Revenue collections in 2017/18 were R0.8 billion lower than estimated in the 2018 Budget. However, revenue collection for the first half of 2018/19 grew by 10.7 per cent compared with the same period last year, but the technical recession experienced in the first half of the year has negative effect on revenue collection, which decreased.
Treasury noted weak economic growth and a once-off payment of overdue VAT refunds, leading to an in-year revenue shortfall now estimated at R27.4 billion, relative to the 2018 Budget estimate. Net VAT collections account for about R20 billion of the in-year revenue shortfall. However, two factors that influenced the revision in net VAT are: The VAT refund estimate has been revised upwards by R9 billion, and about R11 billion will be paid out to clear the accumulation in the VAT credit book (We also note that the accumulation is due to VAT refund that could have been paid). The Davis Tax Committee’s observed that the drop in revenue resulted from past detrimental personnel and policy changes at SARS, culminating in poor compliance by high net worth individuals and multinationals. There were concerns around declining tax morality as a result of unimproved public services. There is room for improved tax administration to reduce profit shifting and transfer pricing.[7]