Poor tax collection adds to spendthrift government’s woes
Evidence presented to the Nugent commission has revealed worrying changes at the SA Revenue Service that appear to have undermined its ability to collect taxes. This contributed in recent years to significant shortfalls in taxes collected compared to what was budgeted. These higher than expected deficits forced the government to increase borrowings, reduce planned spending and increase VAT, the fuel levy and the taxes of highincome earners.
Managing a country’s budget is similar to handling a household budget: the aim must always be to keep spending increases in line with income growth. Government spending has increased dramatically over the past decade, while the economy and income base have barely grown. The government is now consuming a much higher share of national resources that even a well-functioning tax system would struggle to fund. The double whammy is that this occurred at a time of poor revenue collection.
Government spending in the current tax year is budgeted to be 30.1% of GDP; in 2007 it was 25%. This represents an extraordinarily large shift of national resources towards the government. Yet the impact on improving government services is not obvious.
In 2007 tax revenue amounted to 25.9% of GDP and the government enjoyed a budget surplus. At the time, maintaining a surplus in a context of real social need was criticised by many. Then finance minister Trevor Manuel argued it arose from revenue increases that could not be relied upon in future. Company tax receipts had jumped to 6.5% of GDP from 3.1% in 2000 as exceptionally high commodity prices and three years of unparalleled GDP growth had boosted profits. Manuel did not believe this felicitous set of circumstances would last long.
He was wise to be cautious as the 2008 global financial crisis hit GDP growth and company profits. Company taxes have never regained their 2007 level and are expected to be 4.6% of GDP in 2018. Nonetheless, total tax revenue in 2018 is budgeted to be 26.3% of GDP, the highest yet. This increased tax take is being achieved by higher payments by households. The combined contributions of personal income tax and the fuel levy in 2018 will be a significantly larger share of GDP than in 2007. Individuals everywhere are shouldering a bigger burden and are angry about the increased VAT rate and the surging petrol price.
Surprisingly, VAT will contribute the same share of GDP as in 2007. In 2007 the government’s income from VAT was buoyed by robust consumer spending. Now it requires a higher VAT rate.
The budget anticipates still greater increases in 2019 and 2020 in spending and tax revenue as a share of GDP. This will mean continued hard times for households.
The budget projections are predicated on forecast GDP growth of 1.5% in 2018, 1.8% in 2019 and 2.1% in 2020. The collapse of the economy into recession makes even these modest forecasts too optimistic. Lower growth will reduce tax revenue further and increase pressure on the government to cut spending.
Public spending cuts are hard to achieve because the government has committed to above-inflation wage increases for public servants. Unless the state employee base is reduced, the government’s wage bill will take up a larger share of GDP.
Interest payments on rising government debt will also grow, presenting finance minister Nhlanhla Nene with an ever more difficult challenge in balancing the books.
The costs of the past decade of stagnation and the urgency of reigniting economic growth are nowhere more obvious than in the government’s finances. Reckless spending, ballooning state payrolls, corruption and state capture combine with global emerging market uncertainty to form a perfect storm. If the economy continues to stagnate, the government’s future revenue and spending will become even more constrained.
The day will come when the government will have to choose between reducing the number of public servants or cutting social grants. Either outcome will have significant social and political repercussions.