Fiscal dilemma in South Africa
National Treasury’s Ian Stuart says growth situation is dire.
In my 10 years in fiscal policy, I think this is the most complicated, politically difficult and economically difficult budget that we’ve gone into. – Treasury’s Ian Stuart.
National Treasury’s Ian Stuart didn’t mince words when asked to describe SA’s fiscal position at the Tax Indaba on Monday. The economy emerged from a technical recession in the second quarter after expanding 2.5% but SA’s growth situation is still dire. Thus, it’s increasingly difficult for policymakers to take decisions to keep SA on a path of fiscal consolidation, without further impeding economic growth.
On the other hand, taking an expansionary stance could trigger further credit rating downgrades.
“We are facing a significant fiscal dilemma,” Stuart said.
Finance Minister Malusi Gigaba said although the 1.3% GDP growth projection in February’s budget remains at risk, government’s increasingly optimistic that coming quarters may have reasonable GDP performance.
“Our current level of growth, which is outpaced by the rate of growth of the population, is clearly insufficient and unsustainable. We simply have to take drastic measures and do better to get the economy growing faster, bigger, sustainably and more inclusively.”
Therein lies the rub: while growth remains lacklustre, almost every avenue fiscal policy turns into is a cul-de-sac. Stuart said historical data suggests when the economy emerges from a recession, tax revenues will likely be hit.
A preliminary tax revenue analysis shows government’s struggling to meet its projected numbers, added Treasury’s Chris Axelson. “It is a huge dilemma for us. Not only on the expenditure side.”
If Treasury chooses to cut spending (e.g. the wage bill) there’s a risk economic growth and tax revenues could face more pressure. Axelson said while a tax evasion clampdown and closure of loopholes around unprincipled tax avoidance schemes would boost tax revenues in the medium term, government won’t make up a R30.7 billion shortfall from that.
When policymakers are faced with such bad numbers, they must let the budget deficit deteriorate, or change the rates of major tax revenue items, or adjust the fuel levy, he added. While raising taxes could put further pressure on economic growth, a deterioration in fiscal numbers could trigger more downgrades.
Noise in the political environment makes decision-making very difficult, added Treasury’s Anthony Julies. There are also concerns about government’s growing exposure to poor-quality contingent liabilities and guarantees at state-owned companies (SOCs) as well as governance issues at SOCs and a lack of appropriate skills in management.
Julies said if these issues are boldly dealt with, it would improve business confidence immediately. This could lead to better growth and tax revenue outcomes.
Amid significant political uncertainty leading up to the ANC’s December elective conference, large corporates are reportedly sitting on over R1 trillion in cash.
Consumers have also taken strain and seen their tax burden increased and continued wastage has fuelled calls for a tax revolt.