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One of SA’s major challenges from the Covid-19 crisis is the fall in tax revenue

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Busisiwe Mavuso is CEO of Business Leadership South Africa.

With companies shut, workers at home and consumers not spending, tax collections from income tax and VAT have plummeted. In the emergency budget, Finance Minister Tito Mboweni said he was expecting to miss the tax target for this year by over R300-billion, about 21% of the total budgeted for collection. We will get an update this week on 28 October, 2020 in the medium-term budget on how tax collection has trended since.

The tax revenue collapse emphasises how important a healthy economy is for government revenues. There is no substitute for a profitable and growing private sector. There are over two million companies registered for income tax in South Africa, over 550,000 of which pay PAYE on behalf of employees and over 800,000 of which collect VAT on behalf of government. The health of companies is fundamental to the health of national revenue.

The Covid-19 crisis and the 21% fall in revenue is exceptional, but there had already been a negative trend before it. Indeed, taxes on income and profits were R42-billion below target the year before (2019/20) and R13-billion below target the year before that. These revenue shortfalls show that companies and employees are earning less than government had expected and therefore there is less tax to collect.

The problem is particularly acute for corporate income tax. This has fallen from over 25% of tax collected in 2007/8 to 18.1% in 2015/16 to 16.5% of tax in the 2018/19 year. In part this is because corporate tax rates were lowered in 2012 to 28%, bringing SA closer to the OECD average of 20.6%, but the main contributor is that companies are simply not as profitable as they were in the run up to the 2008 financial crisis. 

Similarly, the shortfall in budgeted PAYE collections is because employees are just not earning as much as expected and there are fewer of them, in part due to the struggle companies have faced in building profitable businesses. PAYE is less volatile than corporate income tax because of its progressive structure and the fact that payrolls do not fluctuate as much as profits, but that also makes it more prone to sharp recoveries if the economic environment enables it.

The fiscal crisis we face as a country cannot be solved without solving the dilemma facing the private sector. Economic policy needs to enable the private sector to grow so that it increases employment, increases the amounts paid to employees and increases profits. While over the past 10 years the state has been centred as the driver of an economic recovery, it is plain to see that if we are to achieve fiscal stability, we cannot avoid improving the performance of the private sector. That means we have to follow through on the structural reforms that currently constrain the private sector. 

Energy availability has been a major problem that has contributed to poor corporate performance over the last decade and President Cyril Ramaphosa has rightly focused on resolving that in the next two years. But further liberalisation to enable consumers both large and small to generate electricity for themselves would speed it up and improve the outlook for companies. Similarly, we need to accelerate processes to improve access to broadband by delivering spectrum auctions (it’s over a decade since these were first proposed). We need to improve the ability of companies to bring in foreigners with increasingly scarce skills to counter the loss of skills due to emigration, speed up water and environmental license processing, finalise the MPRDA, which will give mining companies confidence to invest in exploration activity, and put in the infrastructure to increase the capacity of the economy to move goods around the country and out through ports. Many of these issues are rightly incorporated in the recovery plans.

Infrastructure has been prioritised in the economic recovery plans as it should be, but we should not forget that we can make our existing infrastructure work much better than it does now. For example, better use could be made of Transnet’s rail and port infrastructure if concessions were provided to private sector partners to invest and access capacity. 

The fiscal crisis we face is very serious, as minister Mboweni has made clear. There must be drastic action to reduce expenditure on the state, particularly on consumption line items that do not support investment. But it is equally important that the conditions are created for the private sector to recover and, with it, for revenue collection to grow. We all remember the period up to 2008 when tax collection exceeded budgeted amounts regularly and the state was even able to record a revenue surplus. That was the fruit of a growing private sector and improved tax collection capacity. 

Minister Mboweni needs to align fiscal policy with President Cyril Ramaphosa’s economic recovery plan, and then we need ruthless implementation of structural reforms, if we are going to see those times again. BM/DM

Busi Mavuso is CEO of Business Leadership SA.

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  • Rodney Weidemann says:

    Maybe government should also look at creating new sectors and thus generating new tax streams: the simple answer is to get ahead of the global trend and legalise marijuana fully (this is coming anyway, and at least this way we’re on the ground floor, ahead of the developed economies). Instantly you open up the market to not only medical growth of The Herb, but opportunities for ‘Dagga Tourism’ (many foreigners want to come sample our ancient genetics), while thousands of small crop growers in Pondoland and the like become small businessmen (instead of ‘criminals’ who regularly have their crops trashed by police). Small businesses generate tax revenue, as does tourism.
    And not only that, but the entire plant can be used – it can be a replacement for paper; it can be used in construction materials where it is lighter, stronger and lasts longer than regular bricks; it is cheaper to grow than cotton, produces more material per acre and lasts up to two and half times as long when processed; it can even be used for vegan food products and biofuel….
    to give an idea of what we could generate in tax revenue with this simple legalisation: a survey done in the UK a couple of years back indicated that if the government there fully legalised cannabis, the potential tax revenue would be worth an annual three billion pounds – and there are far fewer regular smokers of weed in the UK than there are here in SA!!

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