Where will the minister find the money to make up for scrapping the VAT increase?

Now that Finance Minister Enoch Godongwana has decided to scrap the Value Added Tax (VAT) increase, the next question is where he will find the money, over the medium term, to make up for the R75 billion shortfall caused by his midnight decision.

Maarten Ackerman, chief economist at Citadel, says it is important to keep in mind that in February, when the first budget was presented, National Treasury assumed economic growth of about 1.7%. However, with the trade war now raging, that number is down to 0.8%.

“That immediately, without the VAT increase of 0.5%, puts huge pressure on the revenue side of the budget. The IMF already said there is no way that we will keep our debt-to-GDP below 80%, and its view is that it is heading for 88%.”

Ackerman says the challenge for the minister is now to get an agreement in terms of where they will cut to make the budget balance without the revenue they budgeted for. “Our fiscal position actually deteriorated significantly, not due to the cancellation of the VAT increase, but more in terms of a much lower growth environment.”

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Challenge for GNU to decide where to cut the budget to find the money

“Therefore, I think the challenge for the government of national unity (GNU) is now to get agreement in terms of where they will cut. Obviously, the least popular areas to cut are the social side of the budget and the wage bill that includes the salaries of everybody in the GNU.

“If they do not cut there, where will they cut to find the money? Will they cut on growth initiatives where we need to spend, such as the infrastructure development plan? If we start cutting in the wrong places, it can even be growth-negative for the economy, with some further implications in terms of keeping the primary surplus.”

Ackerman points out that the cuts should be in the areas where there is a lot of fat and wastage, and that money must be reallocated to where we can have growth-enhancing spending to get the economy on track.

He says that while there was not much reaction from the markets, there will definitely be pressure on our bond yields, especially if our debt-to-GDP exceeds 80% and the fiscal situation deteriorates. “If they are not serious about cutting expenses, the market will look through that, and that will be negative for the country.

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Cut the budget where there is excess spending and wastage

“They must probably cut in places of excess and wastage, but that is not always the politically beneficial place to cut. The last thing you want to see is to cut on areas like healthcare, police and all the growth initiatives that should be front in line. They cannot really cut the social grant, given where we are right now.

“It is really time for government to get serious about cutting some of its excess spending. There was mention of cutting the overseas travel bill, and some of our consulates where we have excess staff. That kind of cutting can actually reallocate funds to where it is really needed.”

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What about the additional revenue Sars collected in previous financial year?

Frank Blackmore, lead economist at KPMG, points out that the South African Revenue Service (Sars) collected additional revenue of around R10 billion over the previous financial period, which means that, in fact, no additional funding would be necessary.

“However, you would expect a responsible, citizen-orientated government to find the deficit from expenditure cuts to non-critical service delivery, such as public sector marketing, catering, travel and personal protection budgets, as well as reviewing the size of Cabinet as opposed to cutting public services such as health, education, safety and security.”