Sav­age fis­cal con­sol­i­da­tion a legacy of Zuma’s poi­son pills

In­fra­struc­ture spend will suf­fer most as Trea­sury is forced to re­sort to a VAT hike to bal­ance the books

Business Day - - FRONT PAGE - ● Joffe is edi­tor-at-large.

The first bud­get of the Ramaphosa ad­min­is­tra­tion was pre­sented on Wednes­day by a fi­nance min­is­ter who was a poster child of the Zuma ad­min­is­tra­tion — and it high­lighted the para­dox at the heart of the speech. On the one hand, Cyril Ramaphosa’s as­cent to the pres­i­dency holds out the prospect that SA will make the changes needed to al­ter its eco­nomic course, a prospect that has al­ready boosted con­fi­dence and lifted growth fore­casts off their ear­lier lows, mak­ing the bud­get ra­tios look some­what bet­ter.

Ar­guably, too, the fact that there is now an ad­min­is­tra­tion in place that has po­lit­i­cal le­git­i­macy – and Ramaphosa’s renowned ne­go­ti­at­ing skills – made it pos­si­ble to opt for bud­getary choices such as hik­ing the val­ueadded tax (VAT) rate, which Trea­sury of­fi­cials had pre­vi­ously feared be­cause of the pop­u­lar protest they might trig­ger. On the other hand, this first bud­get of the new ad­min­is­tra­tion was all but crip­pled by the sins of the old. This was the bud­get that had to deal with the poi­son pill of free higher ed­u­ca­tion that Ja­cob Zuma an­nounced on his way out of the pres­i­dency in De­cem­ber.

And, as it turned out, that will cost SA at least R57bn over the next three years, mak­ing higher ed­u­ca­tion the fastest-grow­ing item of gov­ern­ment spend­ing, faster even than the bal­loon­ing cost of in­ter­est on gov­ern­ment debt.

This bud­get had to ac­com­mo­date that on top of the fairly sav­age ex­er­cise in fis­cal con­sol­i­da­tion it al­ready had to un­der­take to res­cue SA’s pub­lic fi­nances from the legacy of the Zuma era.

It is a legacy of years of low eco­nomic growth and the ero­sion of state in­sti­tu­tions, in­clud­ing the South African Rev­enue Ser­vice — a legacy that has seen SA’s pub­lic fi­nances de­te­ri­o­rate to a level at which the pub­lic debt is headed for the R3-tril­lion mark, and two of the three rat­ings agen­cies have al­ready junked us, while the third was on the point of do­ing so.

Against that back­ground, the bud­get that was crafted was more de­ci­sive and sav­age than many might have ex­pected. Cru­cially, it sent a clear mes­sage to rat­ings agen­cies and in­vestors, as well as to the cit­i­zenry and to gov­ern­ment it­self, that gov­ern­ment is se­ri­ous about get­ting a grip on the pub­lic fi­nances – a mes­sage en­tirely ab­sent from Gi­gaba’s dis­as­trous medium-term bud­get pol­icy state­ment, when he was can­did about the prob­lems but of­fered noth­ing by way of so­lu­tions.

Gi­gaba an­nounced tax hikes of R36bn and spend­ing cuts of R85bn over the next three years – an un­prece­dented to­tal of R121bn of fis­cal con­sol­i­da­tion mea­sures – to ad­dress the huge rev­enue short­falls and find the fund­ing for free higher ed­u­ca­tion. That helped im­prove the fis­cal deficits for the next three years of the medium term from 3.9% to 3.6% in the first two years and 3.5% in the third. That’s still not good – the av­er­age deficit is 0.8 per­cent­age points worse than the pro­jec­tions of a year ago.

Up­wardly re­vised growth fore­casts also helped im­prove the ra­tios: act­ing bud­get of­fice head Ian Stu­art says 70% of the im­prove­ment in the deficit came from con­sol­i­da­tion mea­sures, while 30% re­flected higher GDP in nom­i­nal (money) terms.

Cru­cially, how­ever, all this was enough to sta­bilise the ra­tio of gov­ern­ment debt to GDP, which in Oc­to­ber was set to get to 63% by the mid-2020s and just keep climb­ing, but now is pro­jected to level out at 56% by 2023-24 – still high, but rep­re­sent­ing at least a re­turn to gov­ern­ment’s prom­ise of fis­cal con­sol­i­da­tion.

The tax­ing and spend­ing de­ci­sions re­flect, in a way, just how much the legacy of re­cent years has con­strained the choices Trea­sury could make in craft­ing the bud­get.

As Trea­sury deputy di­rec­tor gen­eral Is­mail Momo­niat put it, there was no way of meet­ing such a huge short­fall without deal­ing with one of the “big three” taxes – per­sonal in­come tax, cor­po­rate in­come tax, and VAT.

Ef­forts to ex­tract ever more from per­sonal tax have run dra­mat­i­cally out of road af­ter years of rais­ing the bur­den on an ever-nar­rower base of high-in­come earn­ers – Trea­sury bud­geted to get R28bn of ex­tra rev­enue in the cur­rent 2017-18 year out of the tax hikes an­nounced last Fe­bru­ary, of which R16bn was to have come from per­sonal in­come tax. In­stead, how­ever, this has fallen an es­ti­mated R21bn short of tar­get.

Nor is it pos­si­ble to ex­tract more from cor­po­rate in­come taxes, which tend to be volatile at the best of times and lately have been per­form­ing poorly in an ail­ing econ­omy.

With other coun­tries slash­ing their cor­po­rate tax rates in a bid to be­come more com­pet­i­tive, SA is now an out­lier in terms of its 28% cor­po­rate tax rate and over­all cor­po­rate tax bur­den, says the bud­get re­view. That left VAT as the only real op­tion – and while it’s of­ten seen as more of a bur­den on the poor than on the rich, in SA’s case it is not that re­gres­sive be­cause of the zero rat­ing of sta­ple foods and fuel, with as much 85% of VAT paid by the top 30% of house­holds.

In any event, SA has long been out of line, par­tic­u­larly with de­vel­op­ing coun­tries, in its heavy re­liance on di­rect (in­come) taxes as op­posed to in­di­rect taxes such as VAT.

This be­gins to change that mix, and there could be more hikes to come if gov­ern­ment needs fund­ing for a Na­tional Health In­surance sys­tem. In any event, the ad­van­tage of a VAT hike is that it brings cer­tain rev­enue – and the bold­ness of the de­ci­sion will do much to per­suade rat­ing agen­cies of SA’s se­ri­ous­ness about fis­cal con­sol­i­da­tion.

The mix of spend­ing is much more of a con­cern, how­ever, given that so much of gov­ern­ment’s spend­ing al­ready goes on cur­rent items such as pay­ing pub­lic ser­vants and so­cial grants, rather than cap­i­tal in­vest­ment that would lay down in­fra­struc­ture and boost eco­nomic growth in the longer term. The spend­ing cuts will make that worse, be­cause higher ed­u­ca­tion spend­ing is re­ally just an­other trans­fer to house­holds – and be­cause the most sav­age cuts are to in­fra­struc­ture spend­ing, which ac­counts for 47% of the R85bn in cuts. The tough­est cuts have been im­posed on prov­inces and lo­cal gov­ern­ments, which are meant to do much of the pro-poor and eco­nom­i­cally es­sen­tial cap­i­tal spend­ing on items such as wa­ter or roads.

But higher ed­u­ca­tion is a step change in spend­ing for which the money has had to be ex­tracted. And while the ar­gu­ment is that it will be a key step in chang­ing life chances for young peo­ple from poor homes, one big prob­lem with Zuma’s free-fee poi­son pill was that it was never the prod­uct of a proper, con­sul­ta­tive pol­icy process in which higher ed­u­ca­tion was weighed up against other pol­icy im­per­a­tives, with trade­offs trans­par­ently faced and de­cided on.

Would stu­dents have called for free fees know­ing this would end up hav­ing to be funded with a VAT hike and deep cuts to spend­ing on wa­ter and san­i­ta­tion in­fra­struc­ture for poor peo­ple? With Ramaphosa in place, we have to hope that SA re­turns to the shap­ing of bud­getary de­ci­sions through thought­ful con­sul­ta­tive pol­i­cy­mak­ing pro­cesses — in­clud­ing on the is­sue of how much SA should be pay­ing its pub­lic ser­vants.

There is the hope too that if he and his new team de­liver on his prom­ises of growth, in­vest­ment and job-cre­at­ing re­forms, eco­nomic growth could sur­prise on the up­side over the next three years and more – all of which would make the bud­get bal­anc­ing act much eas­ier.

Graphic: DOROTHY KGOSI Source: NA­TIONAL TREA­SURY

HI­LARY JOFFE

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