The disaster of a dim and tardy taxman
What happens to the public finances and to government’s ability to pay for social grants and other services if the latest tax trends persist? This question is at the heart of the national budget framework, after last week’s budget numbers revealed that the shortfall in tax revenues for the latest, 2016-17, fiscal year was expected to hit R30bn, and that tax buoyancy had fallen below 1 for the first time since the financial crisis.
The buoyancy ratio shows the relationship between the rate of growth in tax revenue and economic growth, in nominal (money) terms. A ratio above 1 indicates tax collections are growing faster than the economy. And from about 2011, the government benefited greatly from the fact that – very surprisingly – the buoyancy ratio was running at above 1 even though the economic growth rate kept slowing down.
That meant SA didn’t have to go the austerity route and do what many other countries had to do postcrisis — slash government spending. Here, by contrast, things got tighter, but there were no cuts to essential services and spending continued to expand, modestly, in real terms. Then came 2016, when tax collections fell off a cliff. The Treasury had to revise down its estimate of the buoyancy ratio, from 1.07 in October, to 0.88 for 2016-17, well below the 1.47 recorded in 2015-16. Did it reflect economic factors or the institutional collapse of the South African Revenue Service? And was it a one-off blip or the start of a more persistent trend?
In a way, it was more surprising that buoyancy stayed so high in an economy that was so weak than that it has crashed now. The Treasury had been pondering the economics of it for some time, and as far back as September’s Tax Indaba, budget office head Michael Sachs touched on the buoyancy question and on the risk that the favourable tide of recent years would turn.
It is a fiscal risk the Treasury flagged strongly in last week’s budget review, pointing out that buoyancy went below 1 in the past when tax reforms were under way and tax rates were being cut. Now it’s at a time when policy is tightening up. The Treasury is still expecting buoyancy to jump to more than 1 again, but it’s possible it could be wrong and we could see another big shortfall in the coming year.
The trouble is that it’s difficult to disentangle the effects of changes in tax administration and tax policy from economic and social changes. And, without understanding the past, it’s hard to predict the future.
There clearly were some macroeconomic oddities that helped boost revenue in the postcrisis period. One was the way public and private sector employees kept winning above-inflation wage increases during the downturn, with public sector employment increasing. That helped drive rapid growth in personal income tax collection, as did generous bonuses and a shift to a more skilled workforce.
Another oddity was that imports kept speeding along even though the economy was sliding and the rand was depreciating, making imports more expensive — and providing a strong boost to import VAT collections and customs duties.
All of that has been ending lately, with imports contracting sharply and no more ballooning of the public sector wage bill. The revenue shortfall seems to reflect that, with personal income tax making up about half the shortfall and VAT, especially import VAT, much of the rest. However, the macro factors are clearly not the only ones. One concern is that as tax rates have risen, that may have prompted a change in behaviour to more tax avoidance. There are serious concerns that the Treasury officials have expressed about a decline in tax morality and the culture of compliance that was so carefully built up from the early years of democracy — and the budget review suggests taxpayers may be getting more evasive about paying up in an environment of state corruption, wastage and poor service delivery.
But the erosion of SARS’s capacity and effectiveness has to be a key factor. We know it has lost more than 55 senior managers, who took with them the institutional memory and on-the-ground knowledge needed to work effectively with taxpayers to bring in the cash, especially from large corporates and high net worth individuals. The specialist capacity SARS used to have in both areas is nothing like it used to be.
SARS’ attempts to meet its targets in the previous, 2015-16 fiscal year would also have had an effect in the latest, 2016-17, year. We know it owes at least R4bn in refunds currently, but a year ago, there were already charges that the revenue authority was holding back refunds and refusing to pay out on settlements before the end of the tax year to boost the figures. Those figures would, in turn, have been reduced when those refunds eventually had to be paid over, no doubt doing plenty of damage to smaller businesses that had to wait months for their money.
But perhaps the biggest problem that comes with SARS’ decline is that most of its newly promoted senior people simply don’t know enough about tax. The Treasury can do macro projections about buoyancy ratios, but it needs SARS to monitor what’s happening on the ground. Something, evidently, SARS is entirely unable or unwilling to do – as the letters between SARS commissioner Tom Moyane and Finance Minister Pravin Gordhan leaked to the Mail & Guardian indicate. It’s easy to understand the immense frustration and concern Gordhan feels when he has a revenue authority that has declared war with him and whose competence to collect taxes is in question.
But the really big political question will be whether President Jacob Zuma’s support for Moyane is so relentless that the president is willing to compromise the public finances to keep him there. If he does, he risks finding one day that he can’t keep paying for the social grants on which the poor rely.
THE BIGGEST PROBLEM COMING WITH SARS’ DECLINE IS THAT MOST OF ITS NEWLY PROMOTED SENIOR PEOPLE SIMPLY DON’T KNOW ENOUGH ABOUT TAX