Budget balancing act for finance minister

MINISTER MUST AVOID ‘DEBT TRAP’

In upcoming Budget, he must find right mix of tax hikes and austerity measures.

Challenge is to present a credible, confidence-boosting budget, enabling SA to avoid universal junk status, says Prof Raymond Parsons.

Finance minister Malusi Gigaba faces a mammoth task in his upcoming budget: finding the right balance of tax hikes and austerity measures to set SA back toward fiscal consolidation, without stifling growth.

Credibility is critical, says Citi’s Gina Schoeman. Markets and the public will have to believe that giving up more in terms of tax will result in fiscal consolidation, efficient government spending and improved GDP growth.

The overall message must be credible, inspire confidence and build on the new mood in SA created by Cyril Ramaphosa’s election as ANC president, says NWU School of Business and Governance Professor Raymond Parsons.

The minister must avoid a “debt trap”, yet help SA to escape a “low growth trap” or it risks drifting into a negative “tax-and-spend” cycle, he adds.

The IMF recently lowered its 2018 GDP growth expectation for SA to 0.9% from 1.1%, while the central bank raised its projection to 1.4% (1.2%). Treasury is expecting 1.1% growth.

Amid low growth, state capture concerns and deteriorating fiscal numbers, it’s the perfect time to institute structural and tax reforms to stimulate the economy, Deloitte’s Nazrien Kader says.

Gigaba’s mini budget announcement that tax revenue was seen falling almost R51 billion short in 2017-18 and that the budget deficit would widen to 4.3% of GDP (3.1%), shocked investors, leading S&P to downgrade South Africa’s local currency rating to junk.

Moody’s placed SA on review for downgrade and will be watching Gigaba’s moves closely.

A current assessment of the projected budget deficit is difficult and will depend on how big ticket items like free tertiary education, nuclear and state-owned enterprises like Eskom will be reprioritised in the budget, Parsons says.

Kader estimates 2017-18’s revenue collection shortfall to be between R50 billion and R65 billion.

Although a VAT hike is regarded as the most efficient way of raising revenue, the Davis Tax Committee has said a one percentage point increase could impede growth by around 0.2 to 0.3 percentage points.

Schoeman estimates that a two percentage point hike in the VAT rate would generate roughly R30 billion in revenue, but warns it’s also likely to deter spending. Therefore, a one percentage point hike might be considered, with the removal of the zero-rating on some items.

The primary concern of a VAT hike is its impact on low-income earners, says Deloitte’s Severus Smuts.

Although there’s significant concern about the impact of further hikes in personal income taxes on this fiscus, there’s a possibility the marginal tax rate for certain high-income earners could go up to 50%.

But commentators warn that SA may have reached a point where further personal income tax hikes won’t yield additional tax revenue, but rather lead to lower production, tax morality and revenues.