Don’t increase taxes; improve collection efficiency

Today’s medium-term budget policy statement (MTBPS) comes against the backdrop of poor global and local growth, falling revenues and cost pressures for households, businesses and government.

As an alternative to raising taxes, government should focus on improving the efficiency of revenue collection through digitisation, modernisation of tax systems and deploying artificial intelligence (AI).

An important question the MTBPS must answer is the true state of government finances as well as the growth, inflation, and job creation outlook.

The Bureau for Economic Research (BER) reported last month that inflation expectations across business, labour and analysts have declined for the first time in two years. However, this piece of good news was followed by the country’s largest medical schemes announcing their customary above-inflation increases.

This suggests that medical inflation will remain high into the first quarter of next year to go with still-high food inflation, which is also subject to upside risks given El Nino weather patterns, rand depreciation and the risk posed by fuel prices.

The National Treasury may have to revise downwards the gross tax revenue estimate of R1.8-trillion announced in the February Budget Review. Tax revenue overruns have disappeared due to the slowdown in commodity prices and uneven global growth, which have affected corporate income taxes. If the Treasury also pencils in lower economic growth (predicted at 0.9% at the beginning of 2023), this could see a deterioration of key fiscal indicators.

Why VAT increase is not an option

One mooted option has been to increase VAT, but this would have the unintended consequence of hurting low-income households more, and if you do not get the underlying consumption growth, you are not likely to collect more revenue.

The SA Revenue Service (Sars) must instead modernise VAT collection. In a recent paper, Sars argued that unlike other categories of taxes such as personal income tax and customs duties, VAT has not kept pace with digitisation and updated technology such as e-filing. It is time to bring VAT collections into the modern age.

Another way of increasing tax revenues without increasing tax rates is to focus on compliance. Addressing base erosion and profit-shifting by multinationals has long been perceived, both in SA and internationally, to be a fruitful potential source of additional tax revenues. Indeed, we are seeing significant transfer pricing audit activity from Sars. However, this is not a short-term fix, as transfer pricing cases are complex and take a long time to resolve. 

Energy action plan update

In July last year, President Cyril Ramaphosa unveiled a six-point energy action plan with short-term and long-term measures to address SA’s energy supply challenges. The plan entailed improving Eskom fleet performance, speeding up procurement of new capacity and increasing private investment. It also included purchasing power from neighbouring countries while encouraging households and businesses to adopt solar and sell energy back to the grid.

The president has since noted that regulatory reforms in the energy sector have led to 12,000MW of projects committed by private investors. But the time lag between commitment and projects coming on stream is key.

Government has also unveiled the details of the enhanced (additional 25% deduction) renewable energy incentive for rapid private investment in renewable energy assets. The incentive is a brief stimulus intended to accelerate over a two-year window from March 1 this year. The investment is critical for bringing into use additional renewable energy capacity. Under the current fiscal constraints, it is not expected to be extended.

Under the enhanced incentive, the generation capacity limit has been removed to allow for larger power generation projects to access the incentive. However, the long lead times for such projects, particularly due to regulatory requirements, mean the two-year investment window may be too short.

The president has now advised that, after the introduction of the incentive and financing mechanism, the amount of rooftop solar installed has doubled to 4,500MW over the past year.

Public debt, SOEs and NHI — what is likely to happen?

The SA public debt, including the Eskom bailout announced in February, means loan debt will rise from R4.73-trillion in 2022/23 (71.1% of GDP) to R5.84-trillion (73.6% of GDP) in 2025/26 and will decline thereafter.

Government is now said to have entered “discussion about discussion” on a possible $1bn to address Eskom and Transnet challenges. The MTBPS must outline how this debt is to be managed and brought within an acceptable level without cutting spending linked to social upliftment or economically enabling areas such as infrastructure.

Government seems determined to implement the National Health Insurance (NHI) over a period of a decade, despite industry objections. And yet the platform on which the NHI is to be built, the public hospital system, has not been adequately addressed. What looks set to happen now is that this process will be characterised by litigation at every stage.

At the national budget in February, government announced that it will unveil which state-owned enterprises (SOEs) are to be sold or kept in the next budget in February 2024. The MTBPS must give an update on this process and what thinking guides it — does government sell only those SOEs that fell prey or could fall prey to state capture? Can you sell a profitable entity? Previously, the proceeds of privatisation were used to reduce debt. What will the proceeds be used for this time? We now know from the president that Eskom and Transnet will not be privatised but will have competition and private sector concessions introduced.

Lastly, in February, government announced a R910bn infrastructure programme over the next three years. However, the person meant to drive that process, Kgosientsho Ramokgopa, has since been deployed as electricity minister, with no replacement announced. This means an area that is crucial for driving economic growth now faces the risk of being neglected. Government cannot afford to lose time and attention on such an important area.

Kubeka is MD: Africa tax & legal, Tshesane government & public services industry leader, Kruger energy, resources & industrials leader, and Marais is senior associate director: SA economic advisory leader and acting chief economist, all at Deloitte Africa.