Doubts raised over the Treasury’s tax revenue forecasts
‘The consistently significant shortfalls against forecasts have, in our view, now resulted in a credibility concern’
Revenue collection has consistently fallen short of budget revenue forecasts since 2014/2015, raising questions over the reliability of the Treasury’s forecasting models, a tax expert argued in parliament on Wednesday.
This raises the danger that the budget deficit will be higher than the Treasury’s forecast for 2019/2020, PwC tax-policy leader Kyle Mandy said. He addressed a public hearing on the 2019/2020 budget organised by parliament’s two finance committees.
Mandy noted that revenue forecasts have fallen short of budget forecasts by a total of R141bn between 2014/2015 and 2018/2019. The revenue shortfall of R42.8bn in 2018/2019 compared with the 2018 budget forecast was attributed by the Treasury to weaker than anticipated economic growth, higher VAT refunds, and problems with tax administration at Sars.
Gross tax revenue is forecast to rise from R1.3-trillion in 2018/2019 to R1.4-trillion in 2019/2020.
“The consistently significant shortfalls against forecasts have, in our view, now resulted in a credibility concern with regards to the accuracy of revenue forecasting. We are concerned that there is a significant risk that the revenue forecast for 2019/2020 could, once again, be overestimated,” Mandy said.
He addressed the question of tax buoyancy, which expresses the rate at which tax revenue grows relative to the economic growth rate. Where there is equivalence, tax buoyancy is at 1. When the growth in tax revenue is higher than economic growth the tax buoyancy is higher than 1; when it is lower it is less than 1.
Mandy believes that tax buoyancy constitutes a significant fiscal risk for the next fiscal year, noting that the Treasury used a tax buoyancy ratio of 1.31 in forecasting its revenue for 2019/2020.
“When the base effects of clearing the VAT refund backlog and the proposed tax increases for 2019/2020 and 2020/2021 are reversed out, this translates to tax buoyancy ratios of 1, 1.1 and 1.1 for 2019/2020, 2020/2021 and 2021/2022, respectively. To put this in perspective, a tax buoyancy of 1 has not been exceeded in any of the past three years, even with the very significant tax increases in those years,” Mandy said.
“Should a tax buoyancy of only 1 be achieved for 2019/2020, this would result in a tax shortfall of R29bn or 0.5% of GDP and would see the deficit increase to 5% of GDP, holding GDP and expenditure stable.
“One gets the sense that the National Treasury is placing too much store in the ability of Sars to substantially improve its performance in the next year and for levels of tax compliance and morality to improve significantly. It will take a number of years to rebuild Sars and recapacitate it to the point where it is able to substantially improve its performance, even with the best will in the world.”
At the same time, Mandy said that SA has run out of space for further tax increases to fund its expenditure demands and to reduce the budget deficit, which is expected to grow to 4.7% of GDP in 2019/2020, stressing that, “The constant increase in the tax burden is unsustainable in the long term.”