Treasury makes the best of a bad hand

THE National Treasury did its best to deliver a progressive budget that stays the course of fiscal consolidation while attempting to promote transformation and greater economic inclusion of the disadvantaged. However, medium-term growth expectations remain dismal.

The national chief financial officer’s office is doing its best to improve the government’s financial position by raising revenue and curbing spending, but this is a painful process.

The government plans to increase revenue by R28-billion this year. The proposed tax changes are set to hit higherincome earners hardest, with a new tax bracket for about 100 000 South Africans earning more than R1.5-million a year.

Revenue will also rise from a partial adjustment of tax brackets for the effects of inflation, by raising the dividend withholding tax to 20% from February 22, increasing the general fuel levy by 30c/litre and the Road Accident Fund levy by 9c/litre. The health promotion levy on sugary beverages will be implemented when the legislative amendments have been approved.

For lower-income earners, there is some relief by way of fiscal drag adjustments.

Although the commitment to deficit reduction is prudent and the progressive manner in which it is being conducted is socially just, there are concerns. These include progress in the office of the chief procurement officer, stabilisation of the balance sheets of state-owned enterprises and, most worrying, an underperformance in tax revenue of more than R30-billion that hints at more than the effect of low growth.

This is the largest tax revenue shortfall since 2009-10. The underperformance in tax collections was the result of lower-than-expected collections in personal income tax, due to low wage and bonus growth. VAT and customs duty collections were also lower as a result of weak import growth.

The deterioration in tax buoyancy — the relationship between gross tax revenue and GDP growth — suggests the government will continue to struggle to meet revenue targets, which could precipitate a VAT increase next year.

The weak growth environment makes it difficult for the government to narrow the budget deficit aggressively.

Acting too quickly will compromise service delivery and hamper economic recovery, further hurting tax revenue. However, significant slippage against fiscal targets will lead to credit-rating downgrades.

As a result, the government is adopting a measured pace of deficit reduction that will see it falling to -2.6% by 2020.

Wednesday’s budget proposal highlighted that the government has limited fiscal flexibility, and bold actions are required to ensure that fiscal targets are met.

Although the stabilisation in net debt and the reduction of the fiscal deficit are in keeping with the thresholds set by ratings agencies, real economic activity remains weak.

Pressure to increase spending, lower-than-anticipated in-

The main constraint is political instability

flation outcomes and elevated political uncertainty will delay fiscal consolidation.

Despite little in the way of initiatives to boost growth, ratings agencies are likely to stay on the sidelines for now. However, any change in the leadership of the finance ministry would be perceived as a rejection of fiscal prudence, inviting a downgrade — as would weak economic growth.

The main constraint to domestic growth acceleration is political instability and the debilitating effect this is having on business confidence and private fixed investment.

Sensible fiscal management is a necessary but not sufficient condition for sustainable and inclusive growth. Until confidence-enhancing leadership is in place, we will muddle along.

Nxedlana is FNB chief economist