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Rising wages and interest costs a slippery slope – Treasury official

Fiscus under increasing pressure amid new spending demands and disappointing growth.

South Africa’s public finances are moving in the wrong direction as the country is spending an increasing proportion of its budget on wages and servicing debt, a Treasury official has warned.

“I think a good measure of a country that is not managing its finances [well] is one that spends its money on repaying debt and wages, and we are moving towards that and I think that is a very concerning trend,” Ian Stuart, acting head of National Treasury’s Budget Office, told delegates at the Government Technical Advisory Centre (GTAC) Winter School on Monday.

His warnings come amid concerns that Treasury may not be able to stick to the plans for fiscal consolidation it announced in the February budget. Although it raised VAT by one percentage point and announced various measures to stabilise the country’s finances and debt, there has been increasing pressure to raise spending.

Recent public-sector wage agreements will cost roughly R30 billion more than the budget provided for over the next three years. South African Airways also recently told Parliament that it would need R20 billion over the next two years to become a sustainable airline, and health minister Aaron Motsoaledi announced plans for the National Health Insurance.

At the same time, the economy remains under pressure, with initial data suggesting that growth might disappoint during the second quarter after GDP contracted during the first three months of the year. More protectionist policies in the global economy and rising interest rates in the US also mean that South Africa is a relatively less attractive investment destination. The 10-year government bond yield has risen over the last few months as markets have become aware of the pressure on the fiscus.

Source: National Treasury

Since the global financial crisis, South Africa has struggled with a consistent structural deficit between revenue and expenditure, which has required a significant amount of borrowing.

At the moment, the country is borrowing roughly R200 billion a year to maintain the current level of expenditure, and a lot of pressures are emerging, Stuart said.

To close the gap, the country will have to raise taxes further or reduce spending.

“Both are very difficult decisions and they have big implications for growth.”

Stuart said there is no free lunch – South Africa has big social priorities, is spending a lot of money and has raised taxes significantly over the past five years.

“The level at which we spend is not supported by the size of the economy as it stands. There are going to be additional decisions to be made I think over the next three years,” he warned.

The table below shows the public wage bill as a share of total expenditure over the past decade. The defence force spent 38% of its budget on wages in 2008 compared to 57% last year.

Source: National Treasury

“This unfortunately is true for a whole host of very large and important departments including provincial health,” said Stuart. “We’ve seen basically across the board that wages are eating up a larger and larger share of spending.”

While cutting wages might seem like the obvious answer, wages account for roughly 80% to 90% of the provincial budget in a department like basic education. Cutting wages would effectively mean cutting back on education, Stuart said.

Even a decision to reposition spending in favour of infrastructure, which is generally considered more growth-friendly in the long run, has its challenges. Stuart referenced major problems in the water infrastructure sector as one such example.

“Every singularly straightforward decision in budgeting has significant trade-offs and costs and benefits that have to be taken into account, and something as simple as … how much debt should South Africa have as a government is an extremely difficult question to answer.”

The International Monetary Fund recently said South Africa was not hard enough on fiscal consolidation and suggested that government should introduce a debt ceiling at around 55% of GDP. 

Stuart is not in favour of such a proposal, arguing that South Africa has to be in a position to take on debt when appropriate.

To introduce such a ceiling would also mean that additional spending cuts or tax increases would be necessary.

“Those have costs as well.”

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On this planet. Today economics have many headlines. dominated by producing hard and software. Having oil, gas, and minerals, are advanced points. Europe have none. Africa plenty. To talk tax or money value from a rich South demand export, not import, products in exchange.

Another thought-provoking Article from Inge 🙂

Where SA is today is “self designed” over the past few decades. Govt took the approach of viewing Business as “the people’s” enemy. Anti-business, but pro-labour. Crime is getting more out of control (i.e. the daily cost of protecting your assets, and life). Corruption. Red tape/bureaucracy in all spheres of national & local govt processes. Over-regulation in many industries. And increasing tax, making SA less favorable as investment destination. (..and many other aspects I may’ve missed). A high tax is NOT a problem, provided the taxpayer receives various reciprocal benefits from the state (in SA it’s a charity). All combined to stifle the economy, which is tilted to allow the connected elite to enjoy prosperity. SA is simply a Zim or Moz in “slow motion”….not difficult to grasp.

An immediate solution, to try attract foreign direct investment, is perhaps to DROP all TAXES to say max 15% for companies; Indiv tax rate 20% max; scrap CGT & inheritance tax. And if crime/security can be addressed at same time, you’re going to have a flow of FDI into SA for the country’s long-term benefit.

Does the Govt have the balls to dramatically drop all taxes? (Nope, the ANC is shit-scared it will lose more votes in 2019 election, so anti-white/indian, and anti-business rhetoric will remain the norm; and police don’t shoot criminal protestors/looters, out of fear it will be made into another “Marikana” which will cost the ruling party votes)

One thing is certain, S’Africans’ middle and upper class live a high and comfortable life, with much of it financed by high personal debt. Red flag!

So what can S’Africans do? Best is to learn from history. I’m now closing my post…as I need time to go and research how the Greek civil society managed their wealth when their Govt went over the cliff some yrs ago, and went into default. (…at least the EU bailed them out).

Dropping taxes is not going to do it … somehow money must be raised to finance government spending. When you cant ‘balance your budget and your revenue is finite you can only cut costs, but the political will to do so is not there and the unions will not stand for it, so it is not an option – witness Escom and how it tried to do just that … better said than done.

There is a way to increase investment and that is by special once off tax allowances allowing the write off of equipment in full as well as the wear and tear allowances. In short a tax holiday equal to the initial investment.

The only way that we are going to rise above this is to elect a different government but that is wishful thinking.

High tax is a symptom of past incorrect economic policy. What SA need (well, any economy in fact) is HIGH ECONOMIC ACTIVITY, with LOWER TAXES across the board.

Look east towards Mauritius. A low-tax country…plenty of growth (most likely for S’Africans 😉 ….so how does their Govt manage to collect enough tax to balance their budget?

If you have high FDI & good economic activity, you can have a low tax on a wider income net.

With SA’s current direction of raising taxes (direct & indirect), any country’s wealthiest citizens (who are also the most globally mobile) will steadily look for tax-residency elsewhere & vote with their feet.

Then the SA Govt will have to raise tax to 100% to be collected off zero activity = Nil income.

A 3rd world govt with its back to the fiscal wall is a fearsome predator. Best be prepared for the day this one starts raiding local bank accounts. I look at the numbers and it leaves me scared out of my wits… why is everyone else so calm?! What am I missing?

The regime is the only entity responsible for this predicament. They cannot blamed Apartheid but themselves. Time to use treason laws!

We read Moneyweb as part of the process of gathering information to enable us to make informed decisions about our finances. In their book, “When Money Destroys Nations” Philip Haslam and Russel Lamberti give us a frame of reference to interpret the information in this article.

They describe the events that lead to hyper-inflation of the currency. These events are like waterfalls, the economy can go down each waterfall effortlessly, but it is impossible to turn back. When the debt levels are high, the economy stagnant and workers strike for wages-increases in anticipation of inflation, and not for the actual inflation increases, the economy goes down the first waterfall. The economy encounters another waterfall when the bankruptcy of SOE’s and municipalities put further demands on government guarantees.

In all events of hyper-inflation the eventual banking crisis was the final waterfall. This happened in Zimbabwe after the land-grabs caused a banking crisis, forcing the Reserve Bank to recapitalize the banks with depreciated currency. The implosion of service delivery at 80% of municipalities, the record-levels of crime and violent protests are already impacting on the collateral for banks.

The ANC painted itself into a corner. They are taking the country down one waterfall after the other, on this river that leads towards hyper-inflation of the currency.

You quoted a book, that seemingly cannot be purchased (tried all the usual sites – excl,takallt,Amzn etc).

Where did you get your copy from?

I got mine from Kalahari.com which is now takealot.com. I see they have the ebook. It is certainly worth the money and time. I believe the book describes what we can expect in the next decade. It is scary stuff indeed.

With a little bit of spine these issues can be resolved…
1. Sell SAA or close it down.
2. tighten the government procurement systems.
2. recover stolen billions.
4. remove anyone with a title deputy director, senior manager and director from government payroll.

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