Spending clampdown could backfire, Sachs warns MPs
The Treasury’s imposition of a clampdown on government spending in 2023/24 could backfire if expenditure was simply delayed to the next fiscal year, Wits University professor Michael Sachs has warned.
Such a move would threaten the Treasury’s expenditure projections as outlined in the budget presented by finance minister Enoch Godongwana last week.
Sachs, who previously headed the Treasury’s budget office and now leads the Public Economy Project at the university’s Southern Centre for Inequality Studies, was joined by various organisations in making presentations on the budget during public hearings held by parliament’s two finance committees on Wednesday.
“Tight control over the authority to use cash [in 2023/24] has forced departments and provinces to comply.
For most government departments February and March are critical for annual spending. It is likely that obligations will be shifted to April,” Sachs told MPs in his presentation, titled “Austerity Mission Accomplished”.
“Time will tell how much of the 2023 cash crunch results in real cuts to expenditure or is confounded by irregular overspending; hidden deficits as obligations are settled in April, leading to further cash shortfalls next year; capital spending, recruitment or other spending being postponed but not cancelled; and diverting cash from essential maintenance, training and other critical (but not urgent) spending items,” he said.
“All of those things would lead to a situation where the budget is reduced this year but the spending pressures recur next year and are impossible to contain. By imposing this cash crunch you are generating perverse incentives that will weaken the capacity of the state.”
The 2023/24 cash crunch resulted in almost all government departments being unable to fulfil their obligations, Sachs said, and this was locked into future years by the 2024 budget as the Treasury planned to continue with its policy of austerity over the medium term.
Sachs said the government had reduced real spending per capita over the past five years, the largest cut in democratic SA’s history. The post-Covid austerity had already seen a reduction of 7.6% and the budget envisaged a continuation of this, aiming to reduce per capita expenditure by a further 3.5%, or almost R1,000 per citizen.
Personal income tax took up an increasing share of the tax burden, with the 2024/25 increase being imposed through fiscal drag, which is achieved by not adjusting tax brackets to take account of inflation and so individuals pay more. The budget
provides for a R16.3bn tax increase through fiscal drag.
Sachs said the Treasury would have to look at alternative tax instruments. While greater reliance on personal income tax would make the overall system increasingly progressive, the use of fiscal drag was regressive, Sachs said, because its biggest impact was on those in the lower-income brackets. It was also inefficient and likely to retard growth compared with other tax policy options.
The Treasury had used fiscal drag in a pro-cyclical way by adding to private demand during boom times and subtracting from it when times were tough, as was the case now, he said.
SA was in a trap of low growth and high interest rates, with debt rising faster than income for more than two decades. It would continue to do so as long at the economy stagnated, he added.
Contrary to the critics of the Treasury’s debt consolidation strategy, who favour more spending, to stimulate growth, Sachs said fiscal expansion did not appear to be the way out because economic stagnation was long term and structural in nature. “Right now supply-side constraints appear binding and market sentiment is negative. Fiscal expansion is likely to raise long-term interest rates faster than it raises growth rates. In the best-case scenario, fiscal expansion could complement reforms if government had a clear and credible reform plan.”
Sachs welcomed the budget’s “more realistic path to consolidation” after the cash crunch of 2023/24. “We are broadly aligned with Treasury on the numbers going forward.”
In their presentation, civil society organisations were critical of the Treasury’s aggressive fiscal consolidation strategy, which they said was having a devastating impact on the poor.
In a written submission PwC tax policy leader Kyle Mandy pointed to the risks to the fiscal framework, including weakerthan-expected growth, which would slow revenue growth and widen the budget deficit; higher borrowing costs; and a deterioration in the balance sheet of major public sector institutions.