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Recent analysis and debate on the issue of revenue shortfall have generated more heat than light.
This has resulted in Sars largely being incorrectly blamed for the downward revision of the revenue target. The revenue authority finds it appropriate to shed light and give its perspective on this matter.
It is no secret that the finance minister Malusi Gigaba has made it clear that the slow economic growth is responsible for the shortfall of R50.1 billion.
Sars finds it necessary to share information on how the system and processes of the revision work. Indeed, it is part of the tax authority’s mandate to inform and educate all citizens, including commentators and other tax professionals.
This process is not decided upon by Sars alone, but involves National Treasury, the South African Reserve Bank and Sars as part of the Revenue Analysis Working Group (RAWC). Based on a consensus seeking process the RAWC recommends a revenue estimate to the Minister of Finance.
Throughout the years this process has ensured integrity and transparency to the determination of Revenue Estimates.
Sars wishes to emphasise the context of the announcement of the R51 billion reduction to the Revenue Estimate by the Minister of Finance at the 2018 Medium-Term Budget Policy Statement (MTBPS).
No doubt this large downward revision is the largest since the 2008/09 financial crisis and will weigh heavily on this fiscal framework and will require a concomitant increase in borrowing.
This then leads to servicing-of-debt costs becoming the fastest growing line item in the budget. Servicing-debt costs remove valuable revenue that could otherwise have been used to improve the lives of our citizens and/or stimulate economic development.
Revenue collection growth correlates strongly with GDP growth and hence the downward revision in revenue must be viewed against a similar sharp contraction in the GDP growth outlook.
Statistical analysis shows that GDP projections retreated from the 1.3% growth anticipated at the February 2017 budget for the 2017/18 financial year to only 0.9% now announced by the minister.
Sars finds it necessary to remind ourselves about the fiscal budget process in South Africa.
Revenue forecasting is done over a medium term or three-year horizon and for any particular year the revenue is pinned down as the Printed Estimate in the February budget preceding the start of the financial year. For instance the 2017/18 financial year which commenced on April 1 2017, was set at R1265.5 billion in the February 2017 budget.
In the normal course of events both the Revenue and GDP trends are fruited by Sars internally and Sarb and National Treasury externally. The performance of this and other macroeconomic parameters are analysed and, if need be, adjustments are made at the MTBPS in October of the financial year.
(When the financial crisis manifested itself in 2009 the MTBPS called for a downward revision in revenue of about R60.6 billion.)
It is well known that the December revenue collections are key indicators as to the outcome of a particular financial year. In December large companies signal their profit outlook when they make their provisional CIT payments. Hence the Minister of Finance is afforded the opportunity to make a final adjustment at the February budget for the year forecast. This is called the revised budget.
Since the movement of GDP and revenue growth largely determines revenue outcomes, internationally accepted benchmarks are used to measure this.
It is important to note that the performance of a tax administration does not minimise the impact of the efficiency of the tax administration as well as the compliance climate or tax morality of taxpayers.
It is advisable to measure the efficiency of Sars in view of international benchmarks.
In 2016/17 Sars, in an extremely low GDP growth environment of 0.7%, registered tax-to-GDP ratio of 26%. This level of extraction was last seen in the mid-2000s when SA benefitted from the commodity boom and significant reforms in the financial sector added additional revenue to the fiscus. The 2016/17 tax-to-GDP ratio also displayed the steady improvement in extraction rate following the rapid decline during the 2009/10 financial crisis.
The other measure is tax buoyancy which is the ratio between growth in the revenue and growth in GDP. The long-term average for this ratio is 1. Of course this aggregate buoyancy must be understood in relation to the buoyancy exhibited by the constituent taxes and their economic drivers. If the aggregate buoyancy is above 1 it means that revenue is growing faster than the economy. This was the case until the start of 2016. In 2016 the buoyancy subsided to just below 1.
The MTBPS announcement for the revenue outlook of R1214.7 billion and GDP outlook of 0.9% for the 2017/18 financial year will, if achieved, eventuate in a tax-to-GDP ratio of 26.0% and buoyancy of 1.02. This speaks well for the performance of Sars.
Coming back to the massive R51 billion reduction, in the February 2017 budget the printed estimate was set at R1 265.5 billion, which required revenue to grow at 10.6% with a GDP growth outlook of 1.3%.
As a first glance this does appear unrealistic but it should be borne in mind that the budget also introduces tax policy changes amounting to R28 billion to support this growth. This includes limited bracket creep relief, a new top marginal rate of 45% and a rate increase in dividends from 15% to 20%, effective February 22 2017.
In addition the normal increases for sin taxes also increased. Stripping out tax policy change the base to base increase in revenue expectation would moderate to 8.6% for financial year 2017/18.
Six months into the financial year it becomes clear that the printed estimate would be in peril. The technical recession affected all taxes and hence the policy matters did not have the desired input.
Despite the 2.5% quarter-on-quarter growth in GDP post the first two quarter recession, a 4% growth in GDP will be required for the remainder of the year to achieve the full year growth of 1.3% anticipated by the February budget.
The exceptionally poor consumer and business confidence has a domino effect on the tax environment.
- After increasing from -10 in Q4 2016 to -5 in Q1 2017, the Consumer Confidence Index (CCI) fell back to -9 in Q2 2017. Although consumer confidence levels remained depressed levels remained above the recent low reached in 2015. Retail sales and new car sales volumes remain key contributors to CCI.
- After plunging from 40 to 29 in Q2 2017, the RMB/BER Business Confidence Index (BCI) rose by 6 points to a still low 35 in Q3 2017, after reaching the lowest since 2009 in the previous period. While the small increase in the third quarter is encouraging, the improvement must be seen in the broader context of continued weak domestic demand, subdued business activity, low profitability and heightened political uncertainty.
Business Confidence in South Africa averaged 44.70 from 1975 until 2017, reaching an all-time high of 91 in the third quarter of 1980 and a record low of 10.20 in the third quarter of 1985.
Job losses and constrained bonuses drag down personal income tax (Pit). This uncertainty is causing consumption anxiety and household spending, both of which drag down consumption-based taxes like domestic VAT and specific excise.
- Real final consumption expenditure by households increased by 4.7% in Q2 2017 after having contracted by 2.7% in Q1 2017, despite a renewed deterioration in consumer confidence.
- Households’ real final consumption expenditure on durable goods surged by 7.4% in the Q2 2017 following a revised contraction of 8.6% in the first quarter. Spending on all durable subsectors increased at a brisk pace, except for personal transport equipment – the largest durable goods component – which contracted further.
Purchases of new motor vehicles may have been impacted by the still-high levels of household debt as well as subdued business and consumer sentiment.
This muted demand slows imports, and hence import VAT and customs duties are both under pressure.
The overall lack of impetus in the economy and regulatory and political uncertainty creates a difficult investor climate, with private sector investments in retreat. Lack of investment gradually translates in lower profits and hence CIT is struggling.
Dr Randall Carolissen is group executive: Research at Sars.
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