Zuma’s hunt for R80bn a perilous sortie
This is a very strange way to run fiscal policy. First, Finance Minister Malusi Gigaba delivers his medium-term budget policy statement in Parliament, complete with invited guests, television cameras, economists dissecting the numbers and a whole parliamentary process to respond to the budget.
Then, not five weeks later, the Presidency issues a onepage media release that should have been the budget.
If the process is disturbing, the numbers are even more so. In essence, the president now wants the Treasury to take more than R80bn out of an already weak economy in public spending cuts and tax hikes in 2018 — equivalent to about 1.7% of GDP.
The aim is to try to stabilise the rapidly rising level of public debt at a time when growth is stagnating and there’s a giant hole in revenue collections.
The trouble is that if the government doesn’t also take drastic action that enables the economy to grow faster, the fiscal measures may prove selfdefeating. They might drive the economic growth rate even lower and the deficit and debt even higher.
And though the Presidency’s statement talked about the government’s commitment to a sustainable fiscal framework, it is becoming painfully clear that fiscal sustainability is not going to happen unless SA, which now has one of the weakest economic growth rates in the emerging market universe, can lift its growth rate materially.
The Treasury has estimated that a 0.5 percentage point increase in the growth rate over the next couple of years would do it for fiscal consolidation, stabilising the debt without any further tax or spending measures.
The R80bn is half new measures, half old. President Jacob Zuma has directed the presidential fiscal committee, led by Gigaba, to make proposals on R15bn of “revenue-enhancing” measures and about R25bn of expenditure cuts — and these shouldn’t be in areas that are negative for growth or job creation.
That’s R40bn in fiscal 201819, or about 0.8% of GDP, which was the Treasury’s estimate in October’s budget of what would be required to stabilise the level of public debt over the next three years.
However, it comes on top of the fiscal consolidation measures Gigaba’s predecessor, Pravin Gordhan, had already announced in his February 2016 and February 2017 budgets. February’s budget already included R31bn of expenditure reductions for next year (2018-19), following a total of R20bn in the current (201718) fiscal year.
Those cuts will already have been allocated to the various national, provincial and local arms of government, which will have had time to adjust.
And they were implemented in stages.
What’s different this time is the president wants additional cuts of R25bn in a single year.
They will come from the same budgets the Presidency and the Treasury already had to target to find the funds for the president’s higher education fee-free plan, which he has now conceded can be phased in. What that means, and where the money will come from, is entirely unclear.
But R25bn is huge given the cutting that has been required already. Chances are there will be some very dysfunctional decisions that will damage service delivery rather than cut fat. Worse is that it’s understood they will mainly affect infrastructure including municipal infrastructure, which would be the most damaging for growth.
The tax hikes will, if anything, be even more damaging. We have already had R28bn of tax increases in the current fiscal year, which have hit the middle classes particularly hard and damped demand and growth. The president wants an extra R15bn of tax hikes added in 2018-19, over and above the R15bn that was included in the February budget. That’s nearly R60bn of extra tax revenue the government wants to extract from an ailing economy over just two years.
A 1% hike in value-added tax (VAT) would almost give the extra R30bn Zuma wants in 2018-19. It would do the least economic damage and be the route most likely to convince ratings agencies and investors that the government is serious about consolidation.
But the VAT idea was apparently proposed before October’s budget and shot down. That leaves other tax hikes, including another round of personal income tax hikes that probably won’t end up plugging the gap — compliance will drop further, as will demand, investment and growth. The result could be an even bigger shortfall and higher deficits and debt levels.
As it is, the R80bn of Zumadirected measures are expected to do no more than stabilise the debt ratio at just under 60% of GDP. They will not take it back to the low 50% range.
But how much of it will be implemented at all is a big question. Perhaps the most disturbing part is there is no longer the careful, consultative policy process that used to be followed. The budget numbers have to be locked down within the next two to three weeks, with Cabinet ideally deciding on the spending and tax options before the December recess. There surely will be pushback.
No wonder the rating agencies are sceptical. But the more profound question is whether SA can grow itself out of the fiscal trap in which it finds itself.
CHANCES ARE THERE WILL BE SOME VERY DYSFUNCTIONAL DECISIONS THAT WILL DAMAGE SERVICE DELIVERY RATHER THAN CUT FAT