Blog


2018-04-11
PLUGGING THE BUDGET DEFICIT – EXPLORING ALTERNATIVE SOURCES OF INCOME


By now we’re all starting to feel the impact of the 1% VAT, fuel and other increases.  Despite an outcry against the VAT increase from various trade unions, NGOs, civil societies and associations and citizens, National Treasury (NT) was of the view that the 1% VAT increase was the best measure to fund the budget deficit of R48,2 billion.

During the parliamentary public hearings on the fiscal framework, it became apparent that the time allowed for public participation and consultation was not sufficient and prevented various stakeholders from making substantive submissions on how else NT could have obtained the funds necessary to fill the budget deficit of R48,2 billion. 

The Parliamentary Standing Committee on Finance (SCoF) pointed out that one of the challenges was that the budget process is governed by the Money Bills Amendment Procedure and Related Matters Act (Money Bills Act) of 2009, which prescribes strict timeframes in terms of finalising the various stages in the budget process.  It was pointed out that the Money Bills Act is in the process of being amended to give both the public and parliament more time to process the budget proposals.

In line with the recommendations from SCoF, the Minister of Finance has requested the chair of the Davis Tax Committee, Judge Dennis Davis to appoint a panel of independent experts to review the current list of zero-rated items.  The aim is to alleviate the impact the VAT and other increases will have on the poor.

Other recommendations included finding alternative revenue sources such as exploring measures to curb corrupt and wasteful expenditure and reduce losses to illicit financial flows and the illicit trade in tobacco.  It is crucial that government departments focus on plugging expenditure and revenue collection gaps rather than seeking it from citizens. 

In its report, SCoF noted that the Auditor General announced in November 2017, that over R45 billion was lost due to wasteful expenditure.  SCoF requested that the Standing and Select Committees on Appropriations concertedly explore measures that can reduce wasteful expenditure.  

In the budget process leading up to the Medium-Term Budget Policy Statement (MTBPS) later this year in October, national government departments and state-owned entities must brief parliamentary committees on their programmes and explain how funds allocated to them was spent.  Committees conducting oversight and holding departments and state-owned entities accountable, will prepare a budget review and recommendations (BRR) reports which will guide departments in terms of policy and spending.  It is in these BRR reports that measures curbing corruption and wasteful expenditure can be explored.  It is important that committees heed this request as proper oversight enhances the constitutional principle of separation of powers between the executive and the legislature.

Another recommendation from the committee was that government agencies do far more to reduce the staggering amounts of money leaving the country though illicit financial flows as well as huge revenue losses from the illicit trade.  SCoF and the Portfolio Committee on Trade and Industry has held several joint public hearings on the illicit financial flows and also vigorously hold the enforcement agencies accountable to report on operational successes, including arrests and convictions.  The committee will be briefed on the illicit trade in tobacco this year.  SCoF may also look at other products that are illegally traded and cause huge losses to fiscus in terms of excise and customs duties.

The South African Revenue Service (SARS) acknowledge that South Africa is losing a large portion of its GDP every year, to the illicit economy.  This has mainly been in the form of smuggling of tobacco products, counterfeit textiles, drug manufacturing and smuggling, illicit mining of gold and diamonds, ivory smuggling and the poaching of endangered species like abalone and rhino.

The illicit cigarette trade is defined as the production, import, export, purchase, sale, or possession of tobacco goods which fail to comply with legislation and or on which taxes have not been paid.  The 2016 illicit cigarette trade figures indicated that approximately 23% of all cigarettes consumed in South Africa were illicit.  In terms of impact on the fiscus, more than R27 billion in tax revenue has been lost to the illicit trade between 2010 to 2016 (at least R4 billion per year).

Other than loss of revenue to the fiscus, Interpol has stated that huge cash flows from the illicit trade in tobacco products are used to fund other criminal activities including drug and human trafficking, money laundering, illegal weapons dealing, smuggling, racketeering, poaching and even, as international research indicates, terrorist activities. 

SARS also, confiscated more than R1,9 billion worth of illegally imported clothing and textile for the period of 2009 to 2014.  An average of R485-million a year.  Union researchers stated that the fiscus lost R3-billion in unpaid import taxes on Chinese imports in 2014 alone.  This, they say, could have funded 9-million monthly child support and 2.1-million monthly old age grants in 2015.  This has seen the local clothing and textile industry suffer tremendously in terms of job losses.

Purchasing illicit goods is therefore not as victimless crime as many of us may have thought.  

A way forward is for committees to explore how they guide government agencies to implement more stringent measures to curb the loss of revenue due to illicit trading.  The Minister of Finance has proposed minimum pricing for tobacco products.  This along with active enforcement at factories and stores, and on-site visits will go a long way in combating the sale of illicit trade.  Strengthening penalties that include harsher fines and prison time may also assist and should be explored.

The budget process is cyclical, meaning that the VAT could be reduced in the following years.  I am keen to hear what the Minister of Finance will say in the MTBPS and what measures government and enforcement agencies have undertaken to curb corrupt and wasteful expenditure and revenue losses due to illicit trade. 

Lastly, as the budget process is unfolding, it is crucial that the public is involved from here on, whether individually or through associations.  This will enhance and enrich this constitutional process of oversight and accountability.  SCoF will be holding further public hearings in May specifically to deal with the impact of the 1% VAT increase. 

 

Zelna Jansen,

CEO, Zelna Jansen Consultancy