Is South Africa head­ing to­wards a fis­cal cliff?

Finweek English Edition - - COVER -

SA is fac­ing a ma­jor chal­lenge to con­tinue f i nanc­ing it s grow­ing ex­pen­di­ture, with its bud­get deficit run­ning at R153bn, or 4.1% of GDP.

Over the past decade, public spend­ing on the main bud­get has in­creased from 26% to 31% of GDP, and gov­ern­ment will re­quire ad­di­tional rev­enues of R12bn in the next tax year if i t wants to avoid cut­ting i ts spend­ing, fi­nance min­is­ter Nh­lanhla Nene said in his medium-term bud­get state­ment in Oc­to­ber.

Gov­ern­ment ’ s ex­pen­di­ture growth has gone on for too long and there needs to be ac­count­abil­ity on that ex­pen­di­ture, says Chris Hart, chief strate­gist at I nvest­ment So­lu­tions. Ex­pen­di­ture needs to start de­liv­er­ing re­sults. “We’re gen­er­at­ing a lot of dead cap­i­tal.” He de­fines dead cap­i­tal as an in­vest­ment with­out any re­turns.

Hart ar­gues that cap­i­tal is al­lo­cated well when there are re­turns on in­vest­ments. He uses the ex­am­ple of the R140bn spent on the Medupi power sta­tion project. “R40bn is money well spent but not R140bn. That ex­tra R100bn is dead cap­i­tal”. Re­sources are be­ing sucked from the econ­omy to meet the in­ef­fi­ciency of the over­heads gen­er­ated, says Hart. “To spend money means it’s be­ing taken from some­where”, and that is of­ten from house­holds.

In this year’s bud­get, Hart would like Nene to cancel taxes on things like cap­i­tal gains, trans­fer duty on house­holds, div­i­dend taxes and taxes on in­ter­est earned. Th­ese taxes cut into cap­i­tal for­ma­tion, es­pe­cially as t h ey re­duce house­hold and in­vest­ment viability.

“It’s like eat­ing seeds but won­der­ing

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