South African Revenue Service (SARS) Commissioner Edward Kieswetter said tax increases are not the answer to the government’s budget deficit and could do more harm than good.
Kieswetter’s comments come in light of Finance Minister Enoch Godongwana presenting the Medium-Term Budget Policy Statement on Wednesday, 1 November.
In his statement, the Minister said the government is facing a severe fiscal deficit as tax revenue is expected to fall R56.8 billion short of what was anticipated in the February Budget.
As government expenditure has outpaced revenue this year, the budget deficit has risen to 4.9% of GDP in 2023/24 compared with the estimated 4% of GDP in the 2023 Budget.
The National Treasury said it will ramp up borrowing, trim spending, and potentially raise taxes to compensate for the shortfall.
Given the extent of fiscal consolidation required, the Finance Minister said he would propose tax measures to raise additional revenue of R15 billion in 2024/25 in the 2024 Budget.
However, Kieswetter told Business Day TV that this additional R15 billion can be collected through a more efficient revenue service, and a tax increase is not necessarily the solution.
“That’s our focus – to continue to work hard and use the money we get from the Treasury in the budget allocation to improve revenue collection,” he said.
“If we can collect the R15 billion from the taxes already due, we take pressure off the Minister to find that money through increasing rates.”
He said the Minister has made it clear that raising taxes is not the government’s preferred choice, “but at the end of the day, you have to balance the books, and the only way you get more revenue is more taxes or to borrow money”.
Help or hurt
The Commissioner has previously said that tax increases in a country with such a small tax base could do more harm than good to the budget.
He explained that any increase in taxes in South Africa will result in a decline in tax compliance, which the country cannot afford as its financial health steadily deteriorates.
“It will affect compliance behaviour, and you cannot afford that. What we saw when VAT was put up to pay for free education was a proliferation of VAT fraud and people fiddling with their taxes,” Kieswetter said.
SARS also noticed a rapid rise in criminal activity from individuals and companies to avoid paying taxes.
Overall, any increase in tax rates would hurt the economy more than benefit it. “Our biggest challenge now is government expenditure, not indiscriminately hiking taxes,” Kieswetter said.
He referenced an economic principle called the Laffer curve, which illustrates a theoretical relationship between the taxation rates in a country and how that affects a government’s tax revenue.
Simply put, the Laffer curve suggests that if tax rates are increased above a certain level, tax revenue can fall.
This is because taxes above a certain level could discourage people from working, resulting in lower consumption expenditure levels and encourage companies to move to other countries.