HOPING FOR A GREAT ESCAPE TOMORROW
LEGENDARY escapologist Harry Houdini began his career escaping from handcuffs but later went on to dazzle audiences with escapes from large milk cans, his specially designed Chinese water-torture cell and buried caskets.
Finance Minister Tito Mboweni faces a similar challenge when he presents the Budget tomorrow.
For Mboweni to effect a successful “escape” he will have to show something of a return to the path of fiscal consolidation – Budget speak for smaller budget deficits in the future – while at the same time resolving the pressing financial demands of Eskom and the other state-owned enterprises (SOEs).
A difficult task, as National Treasury has notched up over a decade of budget deficits, and the debt issuance to fund that overspend has grown substantially. The servicing cost of that debt is growing at the fastest pace of any item in the Budget. The economy has also only recovered from a short recession and limped to a likely growth rate of less than 1 percent in 2018. Tax revenues have consequently been under pressure even after a VAT rate increase last year and a personal income tax (PIT) bracket adjustment that did not fully account for fiscal drag. A higher tax bracket at 45 percent was also introduced, and taxpayers are at the point where they are pondering whether working is worth the effort and whether working on other shores might be much more beneficial.
South Africa’s corporate income tax (CIT) rate of 28 percent is among the highest globally, and there is no room to increase that rate to generate higher tax revenue. The bottom line is that for the collective 80 percent of the country’s tax revenue that is generated by VAT, CIT and PIT, there is little room to tap the tax base that much further. It’s also questionable whether an incumbent government would hike taxes only two months ahead of a national election.
Keeping expenditure within budget is a further challenge for a country battling high unemployment and poverty levels and income inequality, and that has a high demand for basic health, education and security services. The government is paying out social grants to 17.5 million people and has to find funding for the SOEs such as Eskom that will keep the lights on and give us a better chance of growing the economy and, by extension, tax revenues. These are the ties that bind.
The only wiggle room for Mboweni on the revenue side is from the usual increases in “sin taxes” and the fuel levy. Hiking the capital gains tax inclusion rate or dividend withholding tax or holding back on increasing interest exemption thresholds is something that the minister might consider. Maintaining the expenditure ceiling and accommodating the demands of Eskom, in particular, remain fiercely constricting.
The success of the minster will be measured by the cheer (or not) of the currency and the markets. No visible commitment to fiscal consolidation, or an accommodation of Eskom that balloons the deficit, will be viewed in a poor light by the credit ratings agencies and the markets.
It’s a very tough ask, but Houdini made a career out of escaping from tight places. Please take your seats; the show is about to begin.