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Few solutions, significant debt challenges, but a tighter belt for government – Mazars view on budget


Finance Minister Tito Mboweni’s 2020 Supplementary Budget Speech, delivered via video conference today during South Africa’s Covid-19 lockdown, clearly emphasised the dire situation facing the National Treasury. Unfortunately, it did not offer much detail about how it expects to actively raise revenue and reduce expenditure to address the significant debt and revenue shortfall challenges the fiscus faces.

This is according to Mike Teuchert, national head of taxation at Mazars, who points out that Treasury intends to borrow a substantial amount of money in the near future. “There was mention of raising about US$7 billion that Treasury would borrow from international funders, but the Minister did not provide details about what we would be doing differently to repay that debt. In fact, there were no real announcements about tax increases, notable expenditure decreases, or commentary about the handling of state-owned entities (SOEs), which was surprising.”

The fall-off in VAT and PAYE

Teuchert says that one of the most jarring graphics in the Minister’s presentation was a graph showing how significantly VAT and pay-as-you-earn (PAYE) revenues have decreased this year. “We see an almost immediate drop-off in both those tax categories at the start of lockdown. I suppose that this would be expected, but it really shows how hard tax collections were hit within just a few weeks of economic inactivity.”

He adds that SARS has been much more aggressive in its collection of revenue from certain taxpayer classes, and that this is likely to continue as the need to boost revenue intensifies. “There has been a lot more focus on high-net-worth taxpayers. They are also considering technical issues related to categories such as VAT, so I believe that SARS may make headway into increasing revenue collections again.”

Clear warning signs but no way forward

Tertius Troost, tax manager at Mazars, says that one of the points that stood out most prominently in Treasury’s Supplementary Budget document, was South Africa’s debt outlook scenario. “It was a very clear picture of what would happen if government does not take an active approach to addressing the shortfall. It showed that national debt could grow to 140% of South Africa’s GDP by 2029 if Treasury takes a passive approach, while the right remedial action would see debt peak to around 81%, before decreasing. However, we are not clear what this active approach will look like.”

Troost adds that Treasury projects that it will under-collect by an astounding R300 billion, which is significantly worse than initially estimated. The Minster did indicate that Treasury would be looking to collect additional revenue of R5 billion, R10 billion and R15 billion over the coming years through tax increases, but these measures will hardly be enough to catch up to the massive revenue shortfall. The majority of the additional shortfall will be funded by loans, and Treasury will need to put forward a very strong plan to exponentially decrease spending if these tax increases are to make any real difference.”

A plan hinging on infrastructure

Diane Seccombe, national head of tax training and seminars at Mazars, states that Treasury seems to be relying heavily on large, bankable infrastructure projects to help the economy recover. “It is also clear from the message Government is sharing with the public that infrastructure investment and development has a crucial role to play in raising revenue. It seems likely that Treasury and Government are hoping to stimulate economic growth through these projects.”

Seccombe speculates that Treasury may see this avenue as a means to grow employment capacity, consumer spending and ultimately the taxpayer base as a whole.

“Another positive note is that SARS has increased its collection capacity by being more efficient against defaulting taxpayers as opposed to a relentless analysing of compliant taxpayers. It is a repeat of what the Minister said in February, but we also see it as a much-needed confirmation that compliant taxpayers do not have to be afraid that SARS will be targeting them and picking apart every minute detail of their tax duties.”

A possible silver lining

Graham Molyneux, tax partner at Mazars, says that there is at least some positive news contained in the Minister’s presentation as well. “While there are no details on how it is going to be achieved, there is a mention in the Minister’s presentation that Treasury will aim to decrease the cost of doing business and that Government would take steps to improve competitiveness in the market by reducing the dominance of SOEs in network industries. It does give us an indication that Government will be making an effort to reduce red tape for businesses and help the economy grow, which is a positive step.”

That said, one thing that needs to happen according to Molyneux, is that Treasury must provide more clarity on the way forward for SOEs. “We need to know whether Treasury intends to further finance SOEs like South African Airways, and how they are going to handle further bailouts and challenges.”

Putting more notches in a tight belt

Bernard Sacks, tax partner at Mazars notes that the proposed decreases in government expenditure have become more aggressive. “In February, the Minister indicated that government spending would need to be reduced by R160 billion over the next three years. In this latest Budget Speech, the Minister insists that spending must be cut by R250 billion over the next two years. This approach is set to start in July, which does not give government much time to prepare.”

Sacks believes that this is an indication that the Minister is putting faith in the idea of zero-based budgeting, which has been proposed over the last few weeks. “It is a very time consuming and labour intensive system, but Treasury is being forced into it and I hope that they can make it work. However, if the Minister is able to get the message across to the various government departments that this is what they need to do in order to help the country recover, it may be a successful strategy,” Sacks concludes.