Treasury’s big fiscal dilemma
Revenue likely to fall short of budget targets
THE government faces a significant fiscal dilemma as it goes into the medium-term budget in October, risking further damage to economic growth if it implements more tax hikes or cuts spending in an effort to plug the revenue gap.
Treasury officials outlined the dilemma at Monday’s tax indaba and confirmed that revenue collections were likely to fall short of February’s budget targets.
The head of the Treasury’s fiscal policy unit, Ian Stuart, said history suggested that, with the economy coming out of recession, tax revenue was likely to take a big hit, and anyone doing a bit of analysis of the monthly government revenue figures could see that “we are struggling” to make targets.
“We don’t want to be cutting spending or the size of the public sector in the middle of a recession – but if we go more expansionary, we know how it would be viewed by the market,” Stuart said.
“We are facing a significant fiscal dilemma.”
It also emerged at the indaba that tax compliance levels had deteriorated steeply over the past five years of weak economic growth, with South African Revenue Service head of research Randall Carolissen reporting that the number of outstanding tax returns had jumped 77% in pay-as-you-earn tax, 32% in value-added tax and 87% in corporate income tax, with a similar deterioration in late filing over the period.
Finance Minister Malusi Gigaba said he would update the economic outlook at the medium-term budget on October 25.
The 1.3% growth forecast for 2017 in February’s Budget Review remained at risk.
“But we are increasingly optimistic that a reasonable GDP performance may materialise in coming quarters,” Gigaba said.
SA is on negative watch by two of the major ratings agencies, which have warned of further downgrades if the government fails to deliver on its promises of fiscal consolidation.
Some economists expect that the ratings agencies might tolerate some deterioration in the fiscal metrics but will be watching the mix of government spending closely, in particular whether the wage bill is set to keep expanding at the expense of other spending.
Stuart said it was not about cutting spending as such, but ratings agencies would be looking to whether the government had a plan in place to ensure the composition of spending did not get out of hand.
The government needed to ensure the size of the wage bill did not continue to eat up a larger and larger share of non-interest spending.
“The wage negotiations are absolutely crucial at the moment,” Stuart said.
Deputy director-general for asset and liability management Anthony Julies said ratings agencies had known for a while that this would be a volatile and noisy year, and discussions with agencies and investors indicated they were taking a 12- to 18-month view.
SA and other emerging markets have seen strong capital inflows in recent months driven by the global search for yield. One result was that foreign ownership of South African government bonds had now jumped to more than 40% from about 36% in February, he said.
Foreign investors were taking up more of the supply of bonds than domestic investors.
Julies said foreign investors in emerging markets were comparing SA with the likes of Russia and Brazil and saw SA as not too bad.
However, he warned the higher foreign ownership of bonds put SA at more risk.
“Those portfolio flows can very easily be reversed and that would impact on the currency and the cost of borrowing.”
He said ratings agencies were concerned about the quality of exposure to the state-owned companies and about the governance of these entities.
But if the government were to take bold and decisive action to deal with the governance issues, that would improve business confidence and perhaps result in a better outcome on growth and tax revenue. — DDC