Boosting growth is the best way out of SA’s fiscal dilemma and reconfiguring government's spending is integral to doing this is, SA Revenue Service (Sars) commissioner Edward Kieswetter said on Tuesday.
The state cannot “simply continue to spend on the consumption economy” Kieswetter told a webinar hosted by asset management firm NinetyOne.
Instead it must begin to use its revenues to invest in the economy and in legacy infrastructure that will create jobs and “meaningful productive output on an enduring basis”. Growth will create real wealth per capita and “it is the most sustainable response to a growing tax base,” he added.
Kieswetter’s comments come almost a week after finance minister Tito Mboweni delivered the medium-term budget policy statement (MTBPS), which outlined SA’s deteriorating fiscal position in stark relief, and a slower fiscal consolidation path, that will stretch over the coming five years.
But ongoing efforts to rebuild and modernise the revenue service, which was hollowed out under the previous leadership to serve narrow and corrupt interests, will have “a significant impact in the medium term in also addressing the fiscal framework,” said Kieswetter.
“We cannot just depend on a sub-optimal Sars and then debt,” Kieswetter said, adding that “we have already over-borrowed … and that is likely to get worse.”
Sars’s increased investment in the use of technology and data management, as part of building a more capable institution, will make a “significant impact” in stabilising the fiscal framework, he said.
With the economy now forecast to contract by 7.8% due to the pandemic crisis according to the MTPBS, tax revenue shortfalls are expected to come in at R312.8bn below what was projected in the February budget. The shock to the economy translates into large revenue shortfalls over the medium term with the tax-to-GDP ratio only expected to recover to pre-crisis level by 2027/2028.
Mboweni outlined a fiscal consolidation path intended to balance growth with reining in debt, which will see levels peak at more than 95% of GDP in 2025/2026 before declining, versus the target of about 87% in 2023/2024, that was outlined in June.
The MTBPS hinges on deep cuts in spending, notably from the public-sector wage bill, and highlights the need to redirect government spending away from consumption spending, including wages, towards investment.
It also stresses the need for economic reform efforts, in line with President Cyril Ramaphosa’s economic reconstruction and recovery plan, aimed at lifting growth.
As part of the recovery plan, the Ramaphosa administration has committed to strengthening revenue collection to address “revenue leakages”, with the Revenue Service and law enforcement agencies targeting the illegal economy and illicit financial flows, including transfer pricing abuse, profit shifting, VAT fraud, corruption and other illegal schemes.
Kieswetter said that “there are comfortably tens of billions” in undercollections that the agency can catch in its net, as it works to rebuild its capacity.
Kieswetter noted that the agency has identified number of areas of concern, where it is seeing examples of base erosion practices, aggressive tax planning, VAT fraud and individual taxpayer noncompliance.
However, the agency has already had some successes using technology, such as artificial intelligence, and third party data to collect revenues owed. In 2019, it managed to identify 600 companies being used to fraudulently claim VAT refunds and was able to prevent R500m in false claims.
Using data matching techniques, it was able to identify taxpayers who were not declaring income on rental properties they owned and it was able to raise an additional R500m in revenues as a result.
In December, the agency will be finalising its “tax gap” study to quantify the difference between how much tax should be collected and how much is actually collected.
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