There’ll be no tax hikes to ensure primary surplus, Masondo vows

While Sars says there’s a R300bn ‘tax gap’ in SA that presents collection opportunities.

National Treasury does not intend to raise taxes to make sure South Africa maintains a primary budget surplus over the next few years, according to Deputy Finance Minister David Masondo.

He made the comment as a member of the audience at an event hosted by Rand Merchant Bank on Thursday morning – a day after Finance Minister Enoch Godongwana presented the Medium-Term Budget Policy Statement (MTBPS) in parliament.

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One of the more positive aspects of this year’s MTBPS is the fact that South Africa will see a primary surplus for the first time in 15 years, meaning government expenditure is less than revenue.

National Treasury made a commitment in the MTBPS to target a primary budget surplus for the next decade.

Asked if a primary surplus is indeed possible for 10 consecutive years, Masondo jokingly said he was merely present at the event “to support” Godongwana, but he nevertheless responded to the question.

“A primary surplus will be a function of economic growth, getting in more revenue and the structural reforms already introduced by the previous administration,” he said.

Listen/read: ‘We expect an additional 2% growth’ – Godongwana

While acknowledging that tax revenue plays an important role, he stressed that it is not Treasury’s “position” to increase taxes to maintain the primary surplus.

“We’re not interested in that. There’s a limit to how much you can increase tax,” he noted, adding that the Laffer curve suggests there’s a tipping point before raising taxes becomes irrational.

(The Laffer curve is an economic construct showing that as tax levels rise, they eventually hit a saturation point whereafter further increases reduce tax revenue – be it through tax avoidance or evasion, as taxpayers start rebelling against the tax burden.)

“Our policy position is to grow the economy and broaden the [tax] base, not seeking to get a [primary] surplus through increasing taxes. That’s not what we want to do.”

Read: Godongwana’s SA government debt warning

Tax gap in SA

Edward Kieswetter, Commissioner of the South African Revenue Service (Sars), noted during a panel discussion at Thursday’s event that the country has a “tax gap” of around R300 billion.

He said this in response to a question about “how much tax is available” in the economy that could improve South Africa’s fiscal position.

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“Current tax compliance levels in South Africa are at around 65%,” Kieswetter responded.

“Which means non-compliance is at around 35%. But that’s what we know – what we have on our register.”

There is also revenue from Sars’s “known universe” that is not forthcoming, he added.

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“Such as revenue from Sars’s loan debt book, and outstanding tax returns of around R54 million. That easily comes to about R300 billion of the known universe. Then we believe there is also R300 billion [available] from the tax gap, which presents a huge opportunity for Sars to collect this money.”

According to Kieswetter, Sars conducted 115 lifestyle audits, which contributed R1 billion to the fiscus, in the past fiscal year. In addition, 45 cases “flagged” by the Financial Intelligence Centre (FIC) brought in an extra R1.4 billion.

Tax debt reflects hardship

Kieswetter cautioned that growing debt and the struggle to recover that debt is a problem that tax authorities across the world struggle with.

In South Africa, there has been a threefold increase in taxpayers who are saying ‘We can’t pay you’ and a similar increase in requests for repayment arrangements, he noted.

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“Also, many taxpayers apply for suspension of debt to buy themselves more time. These trends reflect the hardships in the economy.”

Revenue shortfall

In Wednesday’s MTBPS, National Treasury lowered the expected tax revenue for the current fiscal year by R22.3 million to R1.84 trillion.

Personal income tax – the biggest contributor to tax revenue – is also expected to come in R9.7 billion lower than the estimations in the February Budget Review.

National Treasury ascribed the decline in personal tax collection to employment losses in the private sector and weaker wages.

“When the team [National Treasury, Sars and the South African Reserve Bank] put together the budget estimate they make certain assumptions, and when they don’t bear out there’s a different outcome,” Kieswetter said.

An example is the wage bill, which was expected to grow by 8.4%. “In reality, it grew by 5.4%. If your wage bill doesn’t grow, taxes on individuals don’t grow, therefore [we had] the under-recovery of personal taxes.”

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