Treasury opts for a measured approach

IN A move to avoid a lowgrowth trap, the Treasury is punting measured rather than aggressive fiscal consolidation.

The Treasury’s mediumterm budget policy statement released yesterday said the measured approach entailed a combination of tax measures that would raise an additional R43 billion in the next two years and a reduction in the expenditure ceiling of R26bn.

Treasury said the proposed tax measures would raise an additional R13bn in 2017/18.

It said the total tax would increase to R28bn in 2017/18 when combined with the tax increase of R15bn in 2017/18 announced in February.

It said as a result of the measures, the consolidated budget deficit would reduce from the current 3.4 percent of gross domestic product (GDP) to 2.5 percent in 2019/20.

But the Treasury warned that while aggressive fiscal consolidation might bolster confidence, it could undermine the economy.

“South Africa’s current circumstances raise the possibility of a low-growth trap. In this scenario, government, facing the need to stabilise national debt, introduces consolidation measures that ultimately prove self-defeating. A tighter fiscal position reduces GDP growth, leading to lower revenue and higher deficits.

“This leads to a dilemma. Aggressive fiscal consolidation may bolster investor and business confidence, but will likely add to the difficulties facing the economy. Taking no remedial action, however, may result in a ratings downgrade, higher interest rates and capital outflows, which could precipitate a recession,” the Treasury said.

The Treasury also flagged the negative effect of low economic growth on the government’s long-term policy commitments. It revised growth to 0.5 percent for 2016 from the previous 0.9 percent it projected in February.

Future growth “As long as our economy is not growing, we cannot afford old levers of expenditure. We must keep an eye on the deficit number… (and also) keep an eye on debt control,” Finance Minister Pravin Gordhan said yesterday.

Addressing the media ahead of his delivery of the statement, Gordhan said fiscal consolidation should not be at the expense of key programmes.

He said the Treasury expected a moderate recovery over the next three years, with GDP growth reaching 2.2 percent in 2019 “as supply-side constraints become less binding, the global economy recovers and business and consumer confidence rebound”.

For the GDP increase in 2019, the Treasury is banking on reliable electricity, improved labour relations, low inflation, a recovery in consumer and business confidence, stabilising commodity prices and stronger global growth.

It said if economic growth remained below 2 percent for longer, the government could not honour its commitment to invest in health, education, defence, social development and infrastructure. “Treasury is of the view that the current level of spending is sustainable if economic growth returns to its historic average of 3 percent.”