After spending the last few years taking the axe to taxpaying businesses, government is surprised to learn that it has run out of money.
With coffers running dry, the Ministry of Finance has told government departments that it is slashing fuel allocations by half and cutting back on travel and other expenses. What the Ministry does not say is how we got here – this is the impact of its own policies on tax revenue.
In a widely circulated memo, George Guvamatanga, Treasury Secretary, says the 43% devaluation of the ZiG in September caused a “substantial mismatch” between what the government spends and what it earns. The government had to increase salaries, at a time when it has to raise food aid and fund farmers, he says. Government departments have to “prioritise their expenditure commitments during this period”. The Ministry will only allow officials to travel abroad when the funding “is provided by agencies other than government, local authorities and State-owned enterprises.” There will also be “rationalisation of fuel for operational requirements by 50%”, he says.
In short; government is out of money and many public services may suffer.
On the surface, the memo may read like it is coming from a prudent administrator telling bureaucrats not to waste money. But Guvamatanga’s memo shows a deeper crisis: government just isn’t raising enough taxes and has failed to control spending. Also, coming just days ahead of Finance Minister Mthuli Ncube’s national budget statement, the memo is sending another dire message; there will be no tax relief from Treasury in the budget.
A look at ZIMRA’s revenue earnings reports shows how government has blown a hole through its own pockets. Company tax makes up just 9.8% of government revenue. In 2022, companies were contributing 15.4% of earnings. The decline shows the impact of the erosion of formal, taxpaying businesses caused by Treasury’s exchange rate policies.
In comparison, corporate tax made up around 20% of South Africa’s tax earnings in 2023, according to data from the South African Treasury.
According to ZIMRA, corporate tax has been “impacted by a growing informal sector that is controlling more than 60% of activities in the economy”. In its half-year report, ZIMRA says: “The companies’ collections missed the target by 14.46% as most of the formal businesses experienced competition from the informal sector.”
Forcing the overvalued formal exchange rate on formal businesses has driven economic activity into the informal market, where traders dodge tax.
Informalisation is also clear on the intermediated money transfer tax (IMTT). Ncube introduced the tax in 2018, taking 2% off most electronic transactions. For a while, it became a big earner. In early 2020, the tax was giving the government 12% of its revenue. Now, this is down to just 3.5%. This is also caused by the decline of the formal economy, reflected by “more usage of cash when transacting”, according to ZIMRA.
Earlier this year, John Legat of Imara Asset Management, warned that Treasury’s policies against formal retail would affect tax earnings, including earnings from Value Added Tax.
“We would opine that Government would be better off making life easier for the formal sector, especially retail, so that at least it has a chance to survive and hence pay its taxes,” Legat wrote. “Government’s aim should therefore be to level the playing field with the informal sector rather than punish the formal one.”
But Guvamatanga has dismissed complaints by retailers, saying they should stop moaning and innovate to compete with informal traders. “If I was your board, I’d fire you, because you are a useless management”, he said in October last year.
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