The SA Institute of Race Relations (IRR) has described the budget presented by Finance Minister Pravin Gordhan as suggesting ‘a government on the brink of fiscal catastrophe and without a plan for either growth or austerity’.
The IRR’s COO, Gwen Ngwenya said to finance expenditure, the minister introduced a bevy of tax proposals including a top marginal tax rate of 45 per cent, a sugar and carbon tax, an increase in the fuel levy of 30c/litre and a Road Accident Fund levy of 9c/litre.
“The Treasury’s plan is an exercise in extracting blood from a stone by squeezing an already over-bled tax base,” she said. “Tax revenue as a proportion of GDP has increased from 21.9 per cent in 1994/95 to a projected 29.8 per cent in 2017/18. The State is, therefore, taking a greater proportion of the wealth generated in the economy. The implication is that the State believes it is able to spend more effectively and efficiently than consumers and the private sector.
She added that a related point was that government expenditure as a proportion of GDP had increased from 26.4 per cent in 1994/95 to a projected 33 per cent in 2017/18. “By international standards, this is a very high level. Our data on the subject extends back to the 1960s and the current level is the highest on record.
“In 2008/09 debt levels bottomed out at 26 per cent of GDP – more than 20 percentage points below the 1994 level. However, debt levels have since escalated sharply and now sit at 50.7 per cent of GDP.”
Ngwenya commented that as debt levels have increased, so too has the government’s interest bill. “The State’s debt cost amounted to 8.8 per cent of total expenditure in 2013/14 but is forecast to increase to 11 per cent in 2019/20.
“At that level, servicing the debt bill will be equivalent to spending on health or housing and community development. Debt is, therefore, starting to crowd out other areas of expenditure.”
According to the IRR six options are available to the government and those include increasing corporate tax rates above the current 28 per cent. But threats to property rights, counter-productive labour policy and onerous empowerment requirements have already reduced South Africa’s economic competitiveness to a point where corporate tax increases will do more harm than good, she claimed.
The second option was to increase the VAT rate. The political consequences of such a move would be too difficult for the minister to consider, so alternatives have been found in secondary taxes such as those on sugar-sweetened beverages.
The third was to further increase the individual income tax rate. The minister raised the top individual tax level from 41 to 45 per cent and, while further increases are possible in future years, the law of diminishing returns risks playing itself out.
The fourth option was to spend less money. Around 60 per cent of the budget goes to social protection expenditure. Personnel expenditure accounts for 35 per cent of the budget. These are the only two areas of expenditure that offer the government any real fiscal breathing room.
The fifth option was to cut wastage and corruption, the extent of which is hard to quantify but could probably be measured in points of GDP. However, the political will to do so does not exist.
The sixth and final option was to grow the economy faster. But many in Cabinet remain hostile to the structural reforms necessary to entice higher levels of investment into the country.
Neither the president in his recent State of the Nation address nor the minister of finance in his budget speech made any compelling statements that suggested the government was serious about reform.
“Our view is that the government has come close to maxing out the revenue it can extract from the economy – but has no workable plan to create new revenue. Taxpayers are over-bled; further borrowing will raise debt levels thus hasten the prospects of rating downgrades and austerity will serve to directly undermine the political future of the ANC.
“The government has very little room to manoeuvre. If current growth and revenue collection targets are not met, the government may find itself in a considerable degree of fiscal, and therefore political, difficulty,” concluded Ngwenya.
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