I couldn’t help but smile when the final arrangements for Wednesday’s budget lock-up procedures for media representatives landed in my inbox.
“Please also note that due to cost containment measures, there might be scaling down on the refreshments provided. Food will still be provided but you might want to come prepared with additional snacks,” part of National Treasury’s e-mail read.
If this is a small glimpse into government’s thinking and finance minister Pravin Gordhan announces decisive action to weed out corruption and curb wasteful spending while keeping tax hikes to a minimum, taxpayers would applaud the effort.
That Gordhan faces an incredibly tough task is not in question.
Since the Medium-Term Budget Policy Statement (MTBPS) South Africa’s economic outlook has deteriorated significantly and this is likely to impact on revenue collection going forward. Moreover, inflation has been accelerating and will probably put pressure on the wage bill, which is linked to inflation.
PwC’s tax team estimates that revenue collection will fall short of the revised MTBPS forecasts by between R12 billion and R22 billion, implying that government would have to increase taxes and/or introduce significant cost reduction measures to ensure it stays on its path of fiscal consolidation and gets a thumbs up from credit ratings agencies.
But while government frequently raises corruption and wasteful expenditure as issues that have to be addressed, unfortunately it is much easier to bridge the funding gap by raising taxes than it is by cutting costs. While a reduction in catering budgets has to be lauded, these smaller type measures won’t be enough to substantially reduce the budget deficit.
What is needed is a large-scale clampdown on corruption.
The Davis Tax Committee
One person who is acutely aware of this and who has on more than one occasion highlighted the need for meaningful action in this area is Judge Dennis Davis who heads up the Davis Tax Committee.
Commenting on the 2015 Budget in February last year, Davis said corruption was a “massive problem” and one of the most painless ways to deal with South Africa’s budget deficit.
He said various parties have indicated that South Africa is losing between R30 billion and R100 billion a year due to corruption.
If these figures are anywhere close to correct, it presents a significant opportunity for government.
To provide some context, tax experts estimate that a one percentage point increase in the VAT rate would raise roughly R20 billion in additional revenue. Meanwhile, the MTBPS projected that South Africa’s consolidated budget revenue would be just north of R1 trillion (R1 000 billion) this year.
As economic pressures build and consumers feel the pinch, there seems to be growing resentment towards tax hikes in the face of reports of wasteful expenditure.
Speaking at another event in November, Davis again drew attention to this matter when he said: “The greater the level of corruption in our country, the less we will have tax integrity and the greater the possibility of a tax revolt and I encounter that amongst people of all classes, genders [and] race groups in the country, who all tell me the same thing and rightly so, which is that ‘you have a level of corruption of a kind which is endemic, why should we pay tax?’”
Since the appointment of the Davis Tax Committee in 2013, it has released reports on the role of South Africa’s tax system, base erosion and profit shifting (BEPS), small and medium enterprises (SMEs), VAT, estate duty, mining tax and carbon tax.
It is unfortunate that its work does not extend beyond taxes (in other words revenue collection), to also include expenditure. As I am of the view that an analysis of any problem is futile if it is not accompanied by action to remedy the situation afterwards (read: accountability), I am not a big fan of commissions of inquiry. Yet, it is probably time for a comprehensive audit of government expenditure – investigating where these billions go to waste, implementing and updating systems to prevent it in future and continuously monitoring and improving the situation.
Sadly, accountability would also be a key ingredient in weeding out corruption once and for all and this is one area where South Africa has not been able to demonstrate its vigilance.
By all accounts, 2016 will be an incredibly tough year for South Africans with more interest rate hikes, rising inflation and potential jobs losses as companies cut costs to respond to the slowing economy.
Against this background, tax hikes will be hard to swallow if government can’t clearly demonstrate that it is taking decisive action to address corruption and wasteful expenditure.
While it is imperative that government convince ratings agencies of its commitment to fiscal consolidation and avoid a junk status credit rating in the short term, getting taxpayers onboard will be just as important if it wants to create jobs, reduce inequality, and alleviate poverty in the long run.
Many taxpayers are pinching their pennies.
They expect government to do the same.
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