South Africa is now going over fiscal cliff and we were warned – economist

South Africa is now going over the fiscal cliff after being warned about it for a decade and now government is suddenly scurrying to find more money to put the brakes on the economic decline although there should not be any expectations of major changes with the election looming next year.

Prof. Jannie Rossouw, visiting professor at the Wits Business School, says the danger he and three other economists warned about in a journal article in 2014 has arrived.

“The end is never pretty and it is here,” he says.

In their article they said their use of the term ‘fiscal cliff’ differs from how it is used in the US.

In South Africa it means that the government runs out of income to cover growing government expenditure.

In the US, it depicts a ceiling on the borrowing capacity of the federal government.

There are three ways to stop the country’s fall over the fiscal cliff, he says: borrow more money, increase tax revenue or cut government spending.

“We cannot borrow more money as it will affect our credit grading and we are already on the grey list. If the country is downgraded further, it will affect the rand and that will cause inflation to increase again and that will affect interest rates.”

The Sars statistics for 2022 showed who pay the most tax: individuals who pay personal income tax and VAT and corporates.

Personal income tax contributes 35.5%, VAT 25.0% and corporate income tax 20.7%, comprising 81.2% of total tax revenue collections.

Rossouw says increasing tax will not help much. High-income earners who pay 20% of tax will simply emigrate.

The economy is also growing slower than the population. Therefore, Rossouw says, as financial advisers have been telling consumers for years, his advice for government is to stop spending,

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Stop spending and wasting money to avoid fiscal cliff

“Stop wasting money, stop the mismanagement of tax payers’ money, charge government employees who are involved in corruption and stop overseas travel and buying expensive cars. Let everybody in government drive around in cheap, locally manufactured cars and stay at home. Meetings and conferences can happen virtually.”

Rossouw says the fact that the minister of finance, Enoch Godongwana, was involved in discussing cost-cutting measures last week shows how serious the problem is.

He is impressed that Godongwana holds his own in this regard.

The Free Market Foundation (FMF) has called on Godongwana to cut cabinet and shelve National Health Insurance and says Treasury’s announcement that there must be significant budget cuts is a welcome sign of fiscal prudence in an age of reckless spending.

The FMF proposes a drastic cut to the size of government, without hindering its obligations in terms of the Constitution, as well as shelving “any financially unsustainable plans like National Health Insurance or the Basic Income Grant”.

The text of the Constitution only mandates the existence of the cabinet portfolios of president, deputy president, finance, cooperative governance, justice, defence and Police, but additional portfolios are required by necessary implication.

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How to shrink cabinet to top falling over fiscal cliff

The FMF says portfolios of those that are not required explicitly or implicitly are simply discretionary and South Africa has too many of these discretionary portfolios, costing the taxpayer millions.

Therefore, the FMF proposes that the current 30 member cabinet can be constitutionally and responsibly reduced to only 10 bureaucracies:

• The Presidency, including the president and deputy president
• Finance
• Defence, including state security
• Justice
• Home affairs, including police and correctional services
• International relations, including aspects of the current trade, industry and competition portfolio
• Public service, including planning, monitoring and evaluation
• Public works, including transport, electricity and water and sanitation and aspects of the agriculture, land reform and rural development, as well as forestry, fisheries and the environment portfolios
• Cooperative governance
• Social development, including aspects of the forestry, fisheries and the environment portfolio and labour and employment portfolio.

The FMF proposes that government scrap basic education, higher education, health and human settlements entirely and devolve their necessary functions to municipal and provincial governments, while the social development portfolio in the central sphere of government would be responsible for the administration of education, healthcare and housing vouchers for indigent citizens.

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These portfolios can be scrapped

The portfolios that the FMF believes can be scrapped entirely, with only a handful of their essential regulatory functions falling to the 10 departments that must be kept, are:

• mineral resources and energy
• women, youth and persons with disabilities
• small business administration
• sport, arts and culture
• tourism
• science and innovation
• communications and digital technologies
• agriculture, land reform and rural development
• labour and employment.

The FMF says we must not be naïve.

“We realise that South Africa’s cabinet and the dizzying number of official posts has more to do with political patronage than with constitutional government. However, with this proposal we seek to show the small number of responsible people in government and society at large that reform is possible without drastic interventions such as a constitutional amendment,” Martin Van Staden, head of policy at the FMF.

The organisation says it is heartened that the National Treasury is realising that fiscal responsibility is key to South Africa’s sustainability.

What are the chances of government doing this and stop us going over the fiscal cliff?

Probably not great.