INTRODUCTION: Finance Minister Enoch Godongwana will present the Medium-term Budget Policy Statement (MTBPS) in parliament tomorrow. The MTBPS outlines government policy objectives and priorities and presents a fiscal framework for the mid-term. It is a three-year rolling outlook, outlining revenue and spending estimates.

THE DEFICIT: In our Report of 3 October, we stressed the need to cut back on expenditure as revenue collections disappointed in a year of weak economic growth and poor exports. This report will focus on the revenue side of the budget. The current weak fiscal outlook originates mainly from a larger than expected decline in government tax collections and tighter financial conditions that have constrained government’s borrowing programme. Government has a revenue gap of R30 billion and turned to SARS Commissioner Edward Kieswetter to increase tax collections to make up the short fall.

It is indeed high time that the minister places greater responsibility on SARS, and provides it with resources, to improve compliance levels and tax collections. There is ample evidence in the media of tax evasion by criminal syndicates operating outside the tax net. Mr André de Ruyter, former Eskom CEO, detailed the modus operandi of a major fuel and coal syndicate operating at Eskom’s power plants. Recent improvements introduced by SARS in its efficacy are yielding material revenue gains, though this will only partly compensate for the general revenue underperformance. Recently SARS made a major breakthrough that did not receive enough media attention.

Three weeks ago, on 12 October SARS reported in a media statement: “A massive inter-governmental search and seizure operation across five provinces was carried out today to break the back of a sophisticated criminal syndicate of alleged coal-smugglers. SARS was the lead agency in today’s search and seizure operation because information became available regarding a host of tax crimes allegedly committed by members of the coal-smuggling syndicate. It is due to such hard work, often behind the scenes, that leads to these investigative breakthroughs and ensures that South Africans can return to a lifestyle without loadshedding. These targeted operations also help to prevent the loss of revenue to the fiscus, which in this case amounted to more than R500 million. The five provinces were Gauteng, Mpumalanga, KwaZulu-Natal, the Free State, and Limpopo.” SARS Commissioner Edward Kieswetter said, “it is because of such naked greed that the country has experienced unprecedented loadshedding ……”. We have money for everybody’s needs, but not for everybody’s greed. SARS took the lead role in the search and seizure operations, not SAPS, nor the Hawks, nor the Asset Forfeiture Unit.

EXPENSES OUTSTRIPS REVENUE: The treasury said total revenue growth was 8.7% year-on-year in August, while total expenditure grew at a stronger pace of 9.2%. South Africa’s budget deficit widened to R238.4bn in the first five months of the 2023/24 fiscal year, or R254.4bn, including Eskom debt relief. This is much bigger than the R160.7bn in the same period in 2022/23. It is expected that the deficit could grow to 5.5% of GDP this year, compared to a Budget 2023 projection of 4.0%, forcing min Godongwana to make tough decisions to plug the deficit. He has three main options to boost revenue – cut spending, borrow more money, or raise taxes. Each of these options has its drawbacks and risks.

REVENUES: Year-to-date (YTD) tax collections were below projections mainly due to a drop in exports and manufacturing. Exports were hit by lower commodity prices, reaching a low in June 2023, and the effect of loadshedding on operations. Logistical problems at Transnet and SA Harbours contributed to less tonnage being exported. Loadshedding also affected manufacturing and retail sales when retailers had to close their businesses and work shorter hours. The expected improvement in electricity supply should support economic activity and tax revenues next year. If the YTD growth in personal income tax revenues can be sustained, it would reach Treasury’s budget estimate, but these revenues have been losing momentum and may ultimately also undershoot, even if only slightly.

FUNDING, RATINGS AND BONDS: Funding is failing to keep pace with the public’s needs, service delivery demands, inflation, and other financial pressures. Expectations of what can be delivered will have to decrease. Funding would partly depend on the extent to which government plans to use funding sources such as government’s gold and foreign exchange contingency reserve account. We don’t expect any improvement in SA’s credit ratings, so government would try to limit any increase in bond issuance, given the poor appetite from foreign investors.

BOTTOM LINE – SARS IS THE ANSWER: The “tax gap” is the difference between taxes legally owed and taxes collected. The overall tax gap is estimated at 39% of the potential tax liability or 2.0% of GDP over the period 2015 to 2017. The biggest source of the tax gap is unreported income. PwC estimates the tax gap to be around R300bn. If SARS can reduce it by just 10% it would generate an additional R30bn in revenue – sufficient to fill the gap mentioned above. We have difficult choices to make. The easy choice is to give Commissioner Kieswetter additional resources to carry out search and seizure operations so that tax collections can increase.