Plugging the budget deficit – exploring alternative sources of income
Corruption, wasteful spending and illicit financial flows come under the spotlight
WE ARE starting to feel the impact of the 1% VAT, fuel and other increases. Despite an outcry against the VAT increase from trade unions, NGOs, civil societies and associations and citizens, the National Treasury was of the view that the 1% VAT increase was the best measure to fund the Budget deficit of R48.2 billion.
During the parliamentary public hearings on the fiscal framework it became apparent that the time allowed for public participation and consultation was not sufficient and prevented various stakeholders from making substantive submissions on how else Treasury could have obtained the funds necessary to fill the deficit of R48.2 billion.
The parliamentary standing committee on finance said that one of the challenges was that the Budget process was governed by the Money Bills Amendment Procedure and Related Matters Act (Money Bills Act) of 2009, which prescribed strict time frames for finalising its various stages. It was pointed out that the Act was being amended to give the public and Parliament more time to process the Budget proposals.
In line with the recommendations of the standing committee of finance, the minister of finance has asked the chairperson of the Davis tax committee, Judge Dennis Davis, to appoint a panel of independent experts to review the current list of zero-rated items.
The aim is to alleviate the impact that the VAT and other increases will have on the poor.
Other recommendations included finding alternative revenue sources such as curbing corruption and wasteful expenditure and reducing losses to illicit financial flows and the illicit trade in tobacco.
It is crucial that government departments focus on plugging expenditure and revenue collection gaps rather than seeking it from citizens. In its report the standing committee on finance noted that the auditor-general had announced in November 2017 that over R45 billion was lost due to wasteful expenditure.
In the Budget process leading up to the medium-term budget policy statement in October, national government departments and state-owned entities must brief parliamentary committees on their programmes and explain how funds allocated to them were spent.
Committees conducting oversight and holding departments and state-owned entities accountable will prepare a Budget review and recommendations reports which will guide departments on policy and spending.
It is in these reports that measures curbing corruption and wasteful expenditure can be explored.
Another recommendation from the committee was that government agencies do far more to reduce the staggering amounts of money leaving the country though illicit financial flows as well as huge revenue losses from the illicit trade.
The South African Revenue Service (SARS) acknowledges that South Africa is losing a large portion of its GDP every year to the illicit economy.
This has mainly been through smuggling of tobacco products, counterfeit textiles, drug manufacturing and smuggling, illicit gold and diamond mining, ivory smuggling and poaching of abalone and rhino.
The illicit cigarette trade is defined as the production, import, export, purchase, sale, or possession of tobacco goods which fail to comply with legislation and or on which taxes have not been paid.
The 2016 illicit cigarette trade figures indicated that about 23% of all cigarettes consumed in South Africa were illicit. More than R27 billion in tax revenue has been lost to the illicit trade between 2010 to 2016 (at least R4 billion per year).
Other than loss of revenue to the fiscus, Interpol has stated that huge cash flows from the illicit trade in tobacco products are used to fund other criminal activities, including drug and human trafficking, money laundering, illegal weapons dealing, smuggling, racketeering, poaching and even terrorist activities.
SARS also confiscated more than R1.9 billion worth of illegally imported clothing and textile for the period of 2009 to 2014. An average of R485 million a year.
Union researchers stated that the fiscus lost R3 billion in unpaid import taxes on Chinese imports in 2014 alone. This, they say, could have funded 9 million monthly child support and 2.1 million monthly pensioner grants in 2015. This has led to the local clothing and textile industry suffering job losses.
Purchasing illicit goods is therefore not as victimless a crime as many of us may have thought.
A way forward is for committees to explore how they guide government agencies to implement more stringent measures to curb the loss of revenue due to illicit trading.
The minister of finance has proposed minimum pricing for tobacco products.
This, along with active enforcement at factories and stores, and on-site visits will go a long way in combating the sale of illicit trade. Strengthening penalties that include harsher fines and prison time may also assist and should be explored.
The Budget process is cyclical, meaning that the VAT could be reduced in the following years. I am keen to hear what the minister of finance will say in the mediumterm budget policy statement and what measures government and enforcement agencies have undertaken to curb corrupt and wasteful expenditure and revenue losses due to illicit trade.
As the Budget process is unfolding, it is crucial that the public is involved from here on, whether individually or through associations. This will enhance and enrich this constitutional process of oversight and accountability.
The standing committee on finance will hold further public hearings in May on the impact of the 1% VAT increase.
UNFAIR BURDEN: Ordinary people must not be forced to carry the burden of making up shortfalls in the fiscus.