Concerns about absence of important expenditure items in mini budget

The absence in the mid-term budget of major expenditure items that the country will incur over the next three years has raised questions.

Failure to reflect them in the forecasts puts the credibility of the budget at stake, says Sharon Smulder, project director of tax policy at the South African Institute of Chartered Accountants.

Finance Minister Enoch Godongwana presented his Medium-Term Budget Policy Statement (MTBPS) on Wednesday, revising estimated revenue income upwards by R83 billion in the current year, R95 billion the year after, and almost R100 billion in the final year of the medium-term period (2024/25).

Smulders says the partial takeover of Eskom’s debt, as well as the public sector wage increases for 2024 are not included in the budget.

This is expenditure the government knows the country will incur – yet is ignored in the budget, she says.

Smulders says in light of these omissions and the impact of a global economic slowdown on SA, the revised estimates may be unrealistic.

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Realistic or not?

Kyle Mandy, head of national tax technical at PwC, says the current year’s revised tax revenue forecasts are in line with that of the PwC’s and are therefore reasonable.

“However, there are of course significant downside risks as highlighted in the budget, which could result in revenues coming in lower if these materialise.”

These risks include the global economic slowdown, increased power cuts that will compromise an already fragile and recovering economy, and a deterioration of the fiscal outlook due to unfunded spending pressures or the realisation of contingent liabilities.

Mandy believes the medium-term forecasts are reasonable, if not conservative. National Treasury has used a conservative buoyancy ratio of one, meaning that revenues grow at the same rate as nominal GDP growth.

“Therefore, the key assumption is nominal GDP growth. In this regard Treasury’s forecasts are not unrealistic.”

Sars’s time to shine

Keith Engel, CEO of the South African Institute of Taxation, says government received an unexpected revenue “bump” from better profitability in the finance and manufacturing sector.

But it seems the South African Revenue Service (Sars) will be doing more to save the day by picking up unexpected revenue. The improved collections from its efforts against non-compliance look set to become a more permanent feature, whereas future revenue collections that are based on economic growth are not that certain.

“The revenue growth government is getting from economic growth is increasingly questionable as global economies are now getting into trouble,” says Engel.

Sars says in its response to the MTBPS that while the performance of the economy is important for revenue collection, Sars’s initiatives have counterbalanced the negative impact of the local and global economy.

“Sars compliance efforts have contributed 12% to the net revenues collected,” says Sars Commissioner Edward Kieswetter.

“This is in line with our revenue management philosophy that has seen our efforts result in an additional R92.5 billion that has been added to the total revenue of R784 billion collected to date.

Listen: Kieswetter explains how Sars’s ‘compliance dividend’ boosted the mid-term budget (or read the transcript)

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Sars has been focusing on debt cash collections, voluntary disclosure management, countering syndicated tax and customs crime, valuation fraud and customs seizures, as well as curbing impermissible and fraudulent refunds claims.

Vat collections

Value-added tax (Vat) collections have been revised down by 4.8% to R434 billion.

This mainly due to capital expenditure and an increased level of exports which resulted in higher-than-normal Vat refunds to business, says Charles de Wet, executive consultant at ENSafrica.

“Despite the higher inflation rate, and thus higher prices, the spend by households is expected to be lower because of lower disposable incomes which will not offset the higher level of refunds,” says De Wet.