THE BALANCING ACT

After years of overspending on a burgeoning government in a lowgrowth environment, SA’S fiscal maths no longer adds up. Pulling the fiscus back from the brink will mean lashings of pain all around

The Jacob Zuma administration has backed SA into a fiscal crisis and if the status quo is allowed to continue the country will be in debt distress within a few years. Finance minister Malusi Gigaba shocked the nation with this revelation when he laid all SA’S fiscal cards on the table in the October medium-term budget last year.

The rand nose-dived in response, S&P Global Ratings immediately junked SA’S local-currency rating and Moody’s put the country on a three-month review for a downgrade — a period that ends just after the 2018 national budget is presented on February 21.

So it’s no exaggeration to say that the upcoming budget is where the buck finally stops.

“This year’s budget speech is expected to be a real show stopper — a watershed year for tax hikes given the projected budget deficit of around 4.5%,” says Deloitte managing partner Nazrien Kader. “Gigaba has a tough job on his hands as he will have to negotiate multiple, sometimes conflicting, priorities.”

For the past five years, successive finance ministers have been tightening the screws on taxpayers and government spending while trying to plug revenue shortfalls with savings, reprioritisation and running down the contingency reserve.

But these measures have taken SA only so far. Chasing deficit and debt targets was never going to be sufficient to ensure SA’S long-term fiscal sustainability in the absence of economic growth.

Now, after five years of slowing economic activity, treasury has emptied its box of fiscal tricks. Politically hard but essential budget choices are all that remain, like hiking Vat, freezing public sector wages, merging ministries, delaying the rollout of free higher education and national health insurance (NHI), selling noncore assets and shelving the country’s nuclear ambitions. The budget should do all this and more.

“Despite years of fiscal consolidation through tax increases and expenditure cuts, SA’S budget deficit remains wide and the debt ratio continues to increase, while the net worth of government [fixed assets less liabilities] has declined,” says Sanlam Investments economist Arthur Kamp. “It’s not working.”

Gigaba’s central problem is that the R50bn revenue shortfall estimated for the current fiscal year — which will grow to a projected R209bn cumulative shortfall over the next three years — is so large that draconian adjustments to taxes and expenditure are now required.

Just sticking to the fiscal trajectory outlined by former finance minister Pravin Gordhan, which aimed to get gross debt to stabilise at about 52% of GDP, will now require tax hikes or spending cuts equivalent to 0.8% of GDP — about R40bn in 2018/2019 rands.

To achieve this Gigaba would, for instance, need to raise the Vat rate and the personal income tax rate by one percentage point each this year.

Raising taxes is hard to do when growth is flat-lining and taxpayers are already heavily burdened. At 26.2% of GDP, SA’S tax ratio is at its highest in six years and among the top 10 in the world, according to Deloitte.

The problem is that SA’S effective personal income tax burden has risen sharply in recent years and all personal tax rates were already upped by one percentage point two years ago. At an estimated 17% last year, the ratio of personal tax on income and wealth relative to personal disposable income is at its highest level yet (see graph).

Cutting expenditure is not