Plug­ging the bud­get deficit – ex­plor­ing al­ter­na­tive sources of in­come

Cor­rup­tion, waste­ful spend­ing and il­licit fi­nan­cial flows come un­der the spot­light

The Sunday Independent - - Dispatches - Zelna Jansen ■ Jansen is the chief ex­ec­u­tive of Zelna Jansen Con­sul­tancy

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.

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