A tax increase is proposed, how much will be raised is estimated, the target is missed and spending grows.
The South African government keeps missing its revenue collection estimates. The ritual should be familiar to anyone who has been paying attention over the past four years: A tax increase is proposed along with estimates of how much will be raised, the target is missed, spending grows faster than inflation while the economy undershoots the GDP growth estimate.
This was the case this week when it was announced that SARS was lowering its 2018/19 revenue estimate down from the R1302.2 billion announced in Minister Tito’s budget to R1287.6 billion, a shortfall of R14.6 billion. This means that government has to fund the difference somehow, either through more tax increases, more debt or some combination of the two.
Of course this latest R14.6 billion figure does not tell the whole story. In the 2018 Medium Term Budget Statement (MTBS) the revenue estimates had to be revised downwards by R27.4 billion. In the 2019 budget, the revenue collected was expected to be R42.8 billion lower instead. So between October 2018 and February 2019, SARS suddenly discovered that their estimates were off by R15.4 billion. Between February 2019 and March 2019 they discovered that actually, those revised, revised estimates were themselves off by R14.6 billion.
This means that the total revenue shortfall for 2018/19 is R57.4 billion rands. This occurs within an environment where for the past four years, taxes have been raised by R16.8 billion, R18.1 billion, R28 billion and R36 billion. Tax increases that are expected to raise R15 billion for the current financial year were announced in February.
Yet, for some reason, the tax raised as a percentage of GDP keeps going down. The national treasury: “Notwithstanding these large tax increases, tax revenue as a proportion of GDP has started to decline.”
It has gone from 25.9% in 2016/17 to an estimated 25.7% in 2018/19, the 2018/19 number will be lower due to this latest revision in expected revenue.
Treasury has acknowledged the problem in their budget documents, but they seem to be labouring under the impression that fixing the administration of SARS will improve the situation. I have no reason to believe any of their guesses, so I think a better guess to make is that our vaunted bureaucrats are getting a lesson in the economics of the Laffer curve.
Simply put, the Laffer curve shows that tax increases can only raise additional revenue up to a certain point, after which any further tax increases actually raise less money for the government. This is because the tax increase, apart from incentivising people to avoid taxes, leads to less money available to invest in the economy and therefore less economic growth. It also leads to a reduction in economic activity by making it more expensive to keep your current staff complement in the case of income taxes like the R13.8 billion announced for this year.
If treasury is honest with itself and the politicians who rely on it’s advice to formulate policy, the only thing to do now is to reduce spending drastically. At a minimum, government spending has to grow at a lower rate than the expected economic growth rate for the year, since this guarantees that debt will decrease, in line with economist Daniel Mitchell’s golden rule. This means GDP and therefore tax revenues would grow faster than spending, which would lead to deficit reduction and eventually debt reduction.
At the last budget, the economy was forecast to grow at 1.5% for 2019/20 (the estimate for 2018/19 is 0.7%, with the current power crisis, 1.5% seems overly optimistic), therefore spending should not grow by more than 1.5%. Consolidated government expenditure is set to grow by 7.8% in 2019/20. This means a widening fiscal deficit which means government has to take on more debt.
A quick point about the 1.5% forecast, during last year’s budget GDP growth for 2018/19 was forecast at 1.5% and is now estimated at 0.7%. They have resurrected the 1.5% for this year even though growth was meant to be 1.8% according to last year’s budget forecast. The government is either lying to us or lying to themselves.
They are stuck in an economic or ideological framework that is simply wrong. Tax revenues will keep declining no matter who heads up SARS as long as spending keeps increasing faster than economic growth.