Sars puts the revenue shortfall in context
This article is a right of reply from the SA Revenue Service (Sars) in response to Barbara Curson’s article “Sars: one step forward, two back”, published on October 24. It has been shortened.
Recent analysis and debate on revenue shortfall have generated more heat than light, resulting in Sars largely being incorrectly blamed for the downward revision of the revenue target.
Finance minister Malusi Gigaba has made it clear that slow economic growth is responsible for the R50.1 billion shortfall.
Revision processes
This involves National Treasury, [Sarb] 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 finance minister.
Revenue collection growth correlates strongly with GDP growth, hence the downward revision in revenue must be viewed against a similar sharp contraction in the GDP growth outlook.
GDP projections retreated from the 1.3% growth anticipated at the February 2017 budget for the 2017/18 financial year to only 0.9%. Fiscal budget process Revenue forecasting is done over a medium term or threeyear 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.
[Normally] both the revenue and GDP trends are fruited by Sars internally and Sarb and Treasury externally. The performance of this and other macroeconomic parameters are analysed and, if need be, adjustments are made at the MTBPS.
December revenue collections are key indicators of the outcome of a financial year. In December, large companies signal their profit outlook when they make provisional corporate income tax (CIT) payments. Hence the finance minister is afforded the opportunity to make a final adjustment at the February budget for the year forecast. This is called the revised budget.
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.
In 2016/17 Sars, in an extremely low GDP growth environment of 0.7%, registered tax-to-GDP ratio of 26%.The ratio also displayed the steady system and improvement in extraction rate following the rapid decline during the 2009/10 financial crisis.
The other measure is tax buoyancy – the ratio between growth in the revenue and growth in GDP. The long-term average for this ratio is 1. 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 revenue is growing faster than the economy. This was the case until the start of 2016. It then subsided to just below 1.
The MTBPS announcement for the R1214.7 billion revenue outlook and 0.9% GDP outlook for 2017/18 will, if achieved, eventuate in a tax-to-GDP ratio of 26.0% and buoyancy of 1.02.
Regarding the 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%.
The budget also introduces tax policy changes amounting to R28 billion to support this growth. 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 the printed estimate would be in peril. The technical recession affected all taxes, hence the policy matters did not have the desired input.
Despite the 2.5% quartergrowth 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 [in] February.
The exceptionally poor consumer and business confidence has a domino effect on the tax environment. Job losses and constrained bonuses drag down personal income tax. This uncertainty is causing consumption anxiety and household spending, both of which drag down consumption-based taxes.
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 into lower profits and hence CIT is struggling. Dr Randall Carolissen is group executive: Research at Sars.