Deloitte says SA faces a tough road to fiscal consolidation

Is SA finally on a sufficiently strong path to fiscal consolidation after last month’s budget announcement, considering a revenue collection shortfall and high levels of debt to gross domestic product ratios?

This was the question posed by Delia Ndlovu, managing partner at Deloitte Africa Tax & Legal, at a recent In Conversation with Deloitte Africa event to evaluate the 2019–20 national budget.

What is clear is that the constrained South African economy can ill afford to retain non-performing assets. So why the insistence on retaining loss-making state-owned enterprises (SOEs)?

It is disheartening having to use taxpayer money to bail SOEs out of debt, as these entities should be driving economic growth rather than draining the fiscus, said Chris Axelson, chief director: economic tax analysis at the National Treasury, during a panel discussion held at the event. He said the Treasury was working on initiatives to ensure a culture of payment, particularly among non-paying municipalities.

There is light at the end of the tunnel at the South African Revenue Service (SARS) in terms of improving efficiencies, said Narcizio Makwakwa, acting chief officer of the Large Business Centre at SARS. The organisation’s Illicit Economy Unit has already addressed gaps, including seizing a significant amount of illicit tobacco products, while the Large Business Centre will focus on investigating ultra-wealthy individuals with assets in excess of R75m and large businesses. SARS, he added, aims to improve the level of tax compliance among taxpayers.

SARS, being cognisant of the need to grow the tax revenue base, has introduced a number of initiatives to improve efficiencies in revenue collection. These include bolstering the Illicit Economy Unit, investing in technology to improve its e-filing system, and reintroducing the Large Business Centre to improve tax collection from large business, wealthy individuals, complex multinational entities, mining entities and financial services entities. The appointment of a permanent commissioner is also imminent.

Axelson confirmed that only income below R1m received by South African tax residents working abroad would be exempt from taxation. Treasury is focusing on implementing this amended tax requirement. An upcoming workshop would not reopen the debate around this issue but rather seek to clarify the promulgations. He explained that an unintended consequence of this legislation was that previously taxpayers were given too much incentive to leave SA. It was also an unusually generous concession when compared with other countries.

Education continues to pose a challenge in SA. The problem is both one of underinvestment as well as not investing smartly for specific outcomes. “Key to achieving longer-term growth is fixing our education system,” said Angelique Worms, director and global employer services leader at Deloitte Africa Tax & Legal. “We should be looking ahead to the skills we will require and then drive education in that area in order to better equip our future workforce.”

The current low-growth environment in SA makes it difficult to stage any meaningful economic recovery or to make a significant dent in reducing poverty and unemployment, said Hannah Edinger, economist and associate director at Deloitte Africa’s Insights team. As the global economy moves into a slower macro growth environment – characterised by, among other factors, an economic slowdown in the US and China – she warned that SA’s growth would slow even further. “We’re a laggard in terms of economic growth even by regional standards,” she said, adding that at current growth levels, unemployment would rise.

Could the budget have done more to unlock opportunities for growth? Jobs will not be created at SOEs, said Edinger, but rather by the private sector – and the small-business sector in particular. SA therefore needs to create an enabling environment where businesses can flourish and ensure that infrastructural projects are not just budgeted for but also implemented.

“For too long SA has kicked the can down the road rather than looking at ways to sustain growth and attract foreign investment,” she said.

SA needs to make every effort to spend on productive sectors and grow the economy in an inclusive way.

Read Deloitte's full commentary on the 2019–20 national budget on the Deloitte website.

This article was paid for by Deloitte.