Is South Africa heading towards a fiscal cliff?
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