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Medium Term Budget Policy Statement 2020: SARS Performance and Government Spending

23 October 2019
– 4 Minute Read


The Medium-Term Budget Policy Statement is taking place on 30 October 2019, and taxpayers anticipate significant shortfalls in tax collections and associated downward revision of the tax revenue collection target for 2020.  ‘Within the context of actual economic performance over the last few years, we suggest that the tax collection target is unrealistic and damaging to the economy and to SARS, and that SARS’ current performance is actually satisfactory,’ says Patricia Williams, tax partner, Bowmans.

SARS presented to the Standing Committee of Finance in relation to its 2018/19 performance, on 9 October 2019.  SARS collected a net amount of ZAR 1 287.7 billion in 2018/19, reflecting a ZAR14.5 billion (1.1%) deficit compared to the 2018/19 target (revised estimate), or a ZAR57.3 billion (4.3%) deficit compared to the 2018/19 Budget target (original estimate).  

‘While there is much discussion around SARS’ underperformance, there appears to be insufficient attention on the actual context of these numbers,’ says Williams. The actual 2018/19 collections reflect growth of 5.9% (ZAR71.2 billion) compared to the 2017/18 year, at a time when nominal gross domestic product (GDP) was 4.8%. ‘Relative to economic growth, SARS’ performance in 2018/19 appears good,’ Williams adds.

‘One would expect that tax collections would track the financial performance of the economy,’ Williams says.  Why, then, was targeted growth in tax collections set at approximately double a realistic GDP growth, in 2018/19?

‘The situation appears equally unrealistic for 2019/20,’ Williams says. Targeted tax collections were ZAR1 422 billion, over 10% higher than the actual taxes raised in 2019.

Taxpayers may feel that, given the detrimental impact of former Commissioner Moyane’s leadership, as reported by the Nugent Commission, SARS should now reflect very large increases on previous years’ collections.  However, that does not consider that it appears that the collections under former Commissioner Moyane’s regime were significantly overstated.

‘The main culprit in this respect was the systemic issue of delayed refunds, on which the Tax Ombud issued a report,’ says Williams.  Another problem was the ballooning debt book of uncollectable debts, which formed a significant discussion topic at the 2018 Tax Indaba, although the impact of this on the reported figures is uncertain.  ‘In these circumstances, SARS’ performance showing improvements over prior years’ overstated collections, reflects very good performance,’ Williams adds.

SARS’ purpose is set out in its 2019 annual report as follows: ‘SARS exists to serve the higher purpose of enabling Government to build a democratic state that fosters sustainable economic growth and social development in the interest and wellbeing of all South Africans’.

Williams says one must question whether expecting tax collection growth substantially in excess of GDP growth ‘fosters sustainable economic growth’.  ‘If legislation is changed to increase relative taxes, in order to collect increased taxes in excess of a realistic growth in profits, this could have a strangling effect on businesses,’ says Williams.  Winston Churchill is credited as having said: ‘I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.’

Tax collections, and government spending, go hand in hand.  Spending cannot simply be increased, expecting taxpayers to be ’bottomless pits’ of available funding.  SARS also cannot expect taxpayers to voluntarily comply with tax laws, without considering the way in which government revenues are spent.  Service delivery and legitimacy of use of tax revenues are important factors in the willingness of taxpayers to comply with tax laws. 

‘One may think that setting higher aspirational targets for SARS’ collections can only be beneficial, but this is not the case,’ says Williams.  SARS’ true purpose is to apply the tax laws as they stand, without fear or favour.  The constant focus on (unattainable) revenue targets encourages aggressive application of tax laws.

For example, SARS is encouraged to apply penalties in a heavy-handed manner.  There is accordingly a tension between SARS’ constitutional and administrative justice obligations, and the measurement systems where SARS is judged on monetary collections.  ‘Constantly setting excessive targets for SARS is demotivating and drives negative behaviours,’ adds Williams.

‘In these circumstances, a downward revision of the tax revenue collection target for 2020 should not only be anticipated, but also hoped for; and taxpayers should be hoping for more realistic tax collection targets and associated restrictions on government spending in Budget 2020,’ says Williams.

‘It is unsustainable to keep spending funds that have not been earned, based on tax collection targets that do not reflect current economic or tax industry realities.  Taxpayers want out of the deficit cycle and associated debt trap, that comes with high tax revenue collection targets,’ Williams concludes.