Crocodile jaws closing around SA’s economy
Tax revenue is falling, while government expenditure continues to rise
CALLING a spade a spade, Finance Minister Tito Mboweni’s Medium-Term Budget Policy Statement (MTBPS) was refreshingly honest about the precarious situation in which the country now finds itself, and the severe challenges we face.
Most notably, he was candid about South Africa’s dire situation: we are effectively facing crocodile jaws that are widening to swallow the economy, as tax revenue has continued to fall, while government expenditure has continued to rocket.
The National Treasury has adjusted economic growth expectations for 2019 downwards to 0.5 percent from the 1.5 percent forecast in February’s Budget speech. Weak demand, shrinking corporate and personal tax collection and anaemic economic growth mean that the country’s Budget deficit is expected to increase to 6.5 percent in 2019, and the debt-to-gross domestic product ratio (GDP) is expected to rise to 71.3 percent by 2022/23.
On the other side of the coin, government expenditure this year has already exceeded the projected increases budgeted for in February, with even more spending still in the pipeline.
Mboweni offered a stark warning to the government that this situation is just unsustainable, and could see South Africa fall into a debt-trap. For example, based on its current trajectory, the MTBPS demonstrated that without implementing the necessary reforms, this combination of rising spending and falling income would see South Africa’s debt-to-GDP ratio breach the 80 percent mark within the next 10 years. This number would then send credit-rating agencies screaming, and almost certainly see South Africa suffer more ratings downgrades.
STAVING OFF CROCODILE’S JAWS
Capping South Africa’s growing Budget deficit and staving off the vice-like crocodile jaws gripping the economy will necessitate increasing tax collection on the revenue side – and Mboweni did mention that we could expect to see more tax increases in the 2020 Budget speech.
However, the government is aware that it does not have much room to manoeuvre in this regard, as businesses and consumers are under severe pressure, and further increases are likely to have a limited impact in terms of generating additional revenue.
That leaves the government only one other option to increase revenue, namely kick-starting economic growth which would in turn increase the size of the tax base.
Consequently, Mboweni outlined the key short-, medium- and long-term issues that the government needs to target, and on this front it was positive to see that one of the first areas that the state will be turning its attention to is tourism.
The tourism sector represents low-hanging fruit for driving economic growth: the country has a great deal to offer tourists relative to the rest of the world; the sector doesn’t require a huge amount of energy (which avoids placing additional pressure on Eskom); and for every tourist who visits our shores, some 10 jobs are created.
Measures such as reducing the cost of travelling to South Africa and reducing the amount of red tape for visas represent easy wins for the country, and could quickly see results.
Other measures, such as diversifying the country’s power generation, expanding telecommunications capacity and lowering the cost of doing business are also crucial for kickstarting growth in the medium term. But after years of seeing good ideas on paper with little action, I hope I will be forgiven for remaining somewhat sceptical about the prospect for implementation.
BALANCING THE BUDGET
One of the fastest growing items on the government’s expense sheet is the country’s debt-service costs, with average nominal growth of 13.7 percent expected between 2020/21 and 2022/23.
These costs are drawing spending power away from crucial areas such as skills development, job creation, education and healthcare, underscoring again that something needs to be done to halt South Africa’s debt spiral.
And on this front, the elephant in the room is the public sector wage bill, which is the largest of all the Organisation for Economic Co-operation and Development countries relative to GDP, accounting for 46 percent of all tax revenue in 2019/20 as a result of years of the burgeoning public sector headcount, and their above-inflation wage increases.
Mboweni pointed out that adjusting for inflation, the average government wage had risen by a shocking 66 percent over the past 10 years – completely disproportionate to increases in the private sector, and without achieving a commensurate rise in productivity.
The question remains, however, whether the government will be able to do anything about its wage bill, and particularly whether it will be able to successfully negotiate with trade unions to moderate wage increases to levels in line with or even slightly below inflation.
Far more optimistically, Mboweni said that he would also deal with the executive remuneration at stateowned enterprises (SOEs) and fiscal leakage. For the foreseeable future, salaries of the Cabinet, premiers and MECs will thus be frozen at current levels, demonstrating that the top layer of government will have to take the pain along with society as a whole.
Additionally, cars for the Cabinet and the executives will be capped at R800 000 (including VAT), although this is still at the luxury end of the scale, particularly compared to the average South African who uses public transport. Capped cellphone claims and economy class domestic travel further round out the Budget cuts.
Other short-term plans for cutting back on excess expenditure are expected to result in some R20 billion in cost savings from various departments. But, while capping expenditure is important, the magic ingredient needed to restore the economy back to health over the next three years is rather to stimulate economic growth through policy implementation.
TALKING THE TALK, BUT CAN HE WALK THE WALK?
On the policy front, it is extremely positive to note that Mboweni’s recently published economic plan draws lessons from fast-growing emerging and sub-Saharan African economies – particularly as five of the fastest growing countries in the world are in Africa.
The minister particularly mentioned that the 10 major criteria that he wants to prioritise are within his blueprint document, which has received widespread feedback. Again, however, it is one thing to mention this plan within the MTBPS and quite another to actually start walking the walk, and all eyes will be on Mboweni to see whether he is able to deliver on his plan.
The numbers at this stage look exceptionally dark, particularly our deficit and debt-to-GDP ratio, so if we can remove the burden of the SOEs, we would be able to fix the sustainability of the fiscal metrics.
Given these numbers, if we do not see the proper implementation of Mboweni’s economic growth proposals, we will certainly be downgraded going into 2020. However, if we do put plans in place to get growth going, implement fiscal discipline and address the problems at the SOEs, the worstcase scenario might be avoided and we could move on to a more sustainable future path.