Today’s budget speech – Tax hikes inevitable

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Media24 reports:

Despite the optimism and hope around President Cyril Ramaphosa’s ascent to power and “riding the change wave” State of the Nation Address (SONA), Wednesday’s National Budget is widely expected to be a wake-up call back to reality.

All and sundry expect a tough budget, with tax hikes and less to spend. Yet the growing strains and risks on public money and its productive use have been with us for a good many years, especially since the debacle around finance ministers in December 2015.

Words and phrases like “at the crossroads”, “low growth trap”, “tough challenges and choices”, and even “austerity burden” have crept into budget talk; one can almost say they have become part of the usual “make a plan and make it work” attitude of South Africans.

But what exactly does a tough budget with constraints and risks mean for the ordinary South African? People should look for the following main elements:

• Shortfalls or deficits (no chance of surpluses this time!), borrowing and new income sources (higher taxes);

• Growth and economic forecasts, as well as stimulation measures; and

• Measures regarding state-owned enterprises (SOEs) and other drains on the state purse or fiscus (cutting expenditure).

Pravin Gordhan’s budget vs Malusi Gigaba’s mini budget

To illustrate further, let us look at how last February’s budget review (with Pravin Gordhan in charge) and October’s mini budget (under Malusi Gigaba) described the situation. Keep in mind that matters mostly deteriorated over the course of last year, although some indicators have improved since Ramaphosa’s election in December – primarily on the back of more trust, confidence and hope.

Last February the review stated:

• “Despite tax increases announced last year, in 2016/17 government expects to collect R30bn less in revenue than projected in the 2016 Budget – the largest underperformance since the 2009 recession.”

This shortfall is expected to almost double to between R50bn and R60bn in the past year (R50.8bn expected in October’s statement).

• “There is heightened uncertainty regarding the path of revenue collection. Risks include general uncertainty about the rate of economic growth, and concerns about tax morality and administration.”

The latter part is a clear reference to the situation at the South African Revenue Service under commissioner Tom Moyane. An inquiry into tax administration matters has already been announced, and speculation is rife that Ramaphosa will replace Moyane.

• “Policy changes without adequate consideration of the budgetary consequences – such as those related to higher education – have required billions of rands to be shifted within tight resource limits, causing other critical programmes to face unanticipated budget cuts.”

Wow, and ten months later a further announcement on free education is made out of the blue! Fortunately the nuclear programme seems to be fading away quietly.

• “Infrastructure projects that are poorly designed or not effectively delivered have resulted in high operating deficits, imposing rising fiscal pressure on implementing agencies. Approving projects without the necessary financial modelling can have far-reaching consequences.”

In October the focus was a bit different: “Several years of fiscal restraint have left funding gaps in both infrastructure and social services, reflected in the build-up of unpaid accounts and financial imbalances.”

• “Financial imbalances are building up in the public sector, particularly in water, electricity and property taxes. There are substantial unsettled bills between national, provincial and local government.”

October’s statement said the imbalances may become more pronounced.

• “The public-sector wage bill has increasingly crowded out other areas of expenditure, limiting government’s ability to improve the composition of spending in favour of capital budgets.”

In October the focus was that the ballooning public sector wage bill “limited government’s ability to increase public employment”. The total wage bill already amounts to between R500bn and R600bn, which means an average increase of only 5% in the salaries of civil servants will cost the state R25bn to R30bn.

• “Debt-service costs, which amount to R162 billion in 2017/18, continue to be the fastest-growing element of the budget, diverting critical resources from frontline services. For every R1 collected in tax, 13c must be diverted to service debt.”

Because of growing deficits the necessity to borrow and the total debt burden (around 50% of GDP) are increasing, making South Africa especially vulnerable against shocks of any kind.

• “Financially distressed or mismanaged state companies have the potential to weaken fiscal sustainability.”

The deterioration continued and substantially accelerated after last February – especially at Eskom, where the real extent of financial distress has only emerged in the course of last year. The government has over past years regularly paid out tens of billions of rand in rescue packages to SOEs and has a total debt guarantee exposure of more than R300bn.

SOEs rack up R700bn debt burden

Fin24’s Liesl Peyper last year wrote that nine SOEs racked up debt of close to R700bn in the 2015/16 financial year, on which they had to pay R51bn worth of interest. That was according to a written answer by Gigaba to a question of the Democratic Alliance in the National Assembly.

Gigaba warned in October that a low growth trap confronts South Africa. The mini budget stated:

“In such a scenario, weak gross domestic product (GDP) growth produces less tax revenue. Aggressive fiscal consolidation to stabilise the growth of national debt and narrow the budget deficit might reduce perceived financial risks, but could also weaken demand, curbing investment and job creation. Yet taking no action could well result in credit-rating downgrades, rapid exchange-rate depreciation and capital flight.

“This cycle feeds on itself. Falling incomes and shrinking resources for public services raise social tensions, deepening political polarisation and creating doubts about future development. Declining confidence and economic uncertainty curb investment, entrenching low growth.”

It is indeed the time for decisive action and a need for cooperation among all parties, as emphasised by Ramaphosa in the SONA.

Also, as the October mini budget statement read, “Much depends on the policy choices made and the effectiveness of their implementation.”

This budget is another chance to change direction.