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Treasury’s massive fiscal dilemma

Without economic growth, it is caught between a rock and a hard place.

“I can’t speak for my colleagues, but in my sort of ten years in fiscal policy I think this is the most complicated, most politically difficult and most economically difficult budget that we’ve gone into.”

National Treasury’s chief director for fiscal policy, Ian Stuart, did not mince words when asked to describe South Africa’s fiscal position at the Tax Indaba on Monday.

Although the economy emerged from a technical recession in the second quarter after expanding by 2.5%, South Africa’s growth situation remains dire. This makes it increasingly difficult for policymakers to take decisions that would keep the country on a path of fiscal consolidation without impeding economic growth even further.

On the other hand, taking an expansionary stance could trigger further credit rating downgrades, which would also add to the country’s woes.

“We are facing a significant fiscal dilemma,” Stuart said.

Finance minister Malusi Gigaba said although the GDP growth projection of 1.3% presented in the February budget remained at risk, government was increasingly optimistic that reasonable GDP performance might materialise in coming quarters.

“Our current level of growth, which is outpaced by the rate of growth of the population, is clearly insufficient and unsustainable. We simply have to take drastic measures and do better to get the economy growing faster, bigger, sustainably and more inclusive,” Gigaba said.

But therein lies the rub: As long as growth remains lacklustre, almost every avenue fiscal policy turns into, is a cul-de-sac.

Stuart said historical data suggests that when the economy emerged from a recession, tax revenues were likely to take a significant hit.

An analysis of preliminary tax revenue figures showed that government was struggling to meet its projected numbers, added Chris Axelson, acting chief director for economic tax analysis.

“It is a huge dilemma for us. Not only on the expenditure side.”

If Treasury chose to cut spending (by cutting the wage bill, for example) there is a risk that economic growth and tax revenues could face even more pressure.

“If we keep increasing taxes in this environment, will it also feed back and suddenly start reducing growth even more? So it is a very difficult position and we’ve got to be very careful about what we do.”

Axelson said while a clampdown on tax evasion and the closure of loopholes with regard to unprincipled tax avoidance schemes would boost tax revenues in the medium term, government was not going to make up a R30.7 billion shortfall (as communicated in the February budget) by closing a loophole.

When policymakers were faced with such bad numbers, they either had to let the budget deficit deteriorate, or had to change the rates of the major tax revenue items such as personal income tax, VAT and corporate tax or adjust the fuel levy, he added.

While raising taxes could put further pressure on economic growth, a deterioration in fiscal numbers could trigger more downgrades.

Noise in the political environment made decision-making very difficult, added Anthony Julies, deputy director-general for assets and liability management at National Treasury.

At the same time, there were concerns about government’s growing exposure to poor quality contingent liabilities and guarantees at state-owned companies like Eskom and South African Airways.

Governance issues at state-owned companies and a lack of appropriate skills at a board and management level are also cause for alarm.

Julies said if these issues are dealt with in a bold, decisive manner it would improve business confidence immediately. This could lead to better growth and tax revenue outcomes. 

He said while there was concern about the rate of growth in South Africa’s debt to GDP metrics, it was a deliberate decision to invest in social programmes and infrastructure in the wake of the 2009 downturn. However, Treasury did not expect that economic growth would remain low for so long.

“The denominator is the problem. It is the GDP and we are sitting with this low growth for an extended period. The question is what is it that we need to do to get the GDP number up and it is about confidence.”

Amid significant political uncertainty in the run-up to the ANC’s elective conference at the end of 2017, large South African corporates are reportedly sitting on more than R1 trillion in cash.

“I don’t know whether everyone is just waiting for the post-December period and whatever the outcome there,” Julies said.

Consumers have also taken strain and have seen their effective tax burden increased. Continued reports of wastage have fuelled calls for a tax revolt.

Tax morality plays a significant role in the success of a country, Gigaba stressed. Government recognises that tax morality is closely linked to the efficient use of resources and a reduction in corruption.

“Government needs to do its part in showing that the taxpayer’s money is used wisely – that efforts are taken to reduce wasteful expenditure and that taxpayers are treated fairly,” he added.

Stuart cautioned against arguments that tax revenues were not generating returns. Social grants had an enormous impact on poverty and inequality in South Africa, a large infrastructure programme was ongoing and tax revenue played an important role in all social services.

One of the issues South Africa hadn’t dealt with correctly was accountability around spending, he argued.

Every government department and entity had an accounting officer that was meant to account for the decisions and spending that had been undertaken. If the accounting officer did not do so, the political system had to hold the person to account.

“The issue is that the numbers that are in there [the budget] need to be taken seriously by the people that are running the department and ultimately Parliament.”

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there will NEVER be growth while corruption is an issue – which it is in sa. actually finding more revenue is not that hard – just tax and tax and tax. no one is going anywhere – so pay up for the pleasure of living in a “soon-to-be” failed country

Robert your malice is palpable and you are wrong. What you simply don’t understand is that taxation changes behaviour hence the revenue is not infinite. There is a feedback in the system if you like. The reason my son locks his expensive bicycle away is to keep it out of the hands of criminals. For the same reason people stash undeclared cash overseas. There comes a point where people no longer produce as the product of their labour is primarily that of the regime. So they stop producing. This is Pikkety’s greatest mistake – he assumes ceteris paribus i.e. all other things being equal but they are not. Excessive taxation simply leads to emigration of those who can (e.g. Zimbabwe), avoidance structures (e.g. USA), working fewer hours or not at all (Australia) and mass tax evasion (e.g. Israel). There are many global precedents but all have one result: lower not higher revenues.

There will not be growth while our public-sector wage bill is 14% of GDP and climbing. The reason Treasury is in a pickle is because it’s being asked to do the impossible: pay unproductive people, and make the economy grow. This is, quite obviously, a contradiction.

Corruption is merely an inevitable symptom of an over-centralised, over-planned economy. It’s a side-show compared to our fundamentally broken policy.

The communists, which include Gordhan, are simply reaping what they sowed.

“Tax morality plays a significant role in the success of a country, Gigaba stressed.” So does politician morality which is what you should stress at cabinet meetings I think. Quid pro quo. Do you seriously expect us as taxpayers to keep to our side of the bargain while you and your buddies are siphoning off industrial amounts of cash to feed your extravagant lifestyles and those of the others at the trough ? The law of diminishing returns now kicks in no matter what laws you pass. You are throttling the goose that lays the golden eggs and you have no one to blame but yourselves.

Welcome to NO HOPE COUNTRY!!! SO SAD!!! FEEL SORRY FOR ALL OF YOU AT THE TIP OF AFRICA!!!

If SARS just applied the tax rules equally to all connected people such as the Guptas and the Zumas I am sure they would make up a significant part of their shortfall. A lifestyle audit on the Guptas who apparently declared R 1 million odd income while becoming extremely rich in a short space of time should reveal quite a bit. There is also the question of whether wedding expenses were claimed as a business expense. There’s R 20 odd or was it R 30 odd million extra income to be taxed. Instead the Commissioner facilitates R 70 million refunds? It would assist with tax morality if it could be seen that the rules were applied fairly to all taxpayers, not just strictly to the unconnected.

Believe anything ANC ministers and their support clerks say at your peril – the record speaks for itself. Corruption and incompetence is the order of the day as we head for the failed state status. What on earth will alter the course??

Sorting out the economy really only needs two concerted actions;
1) put an immediate stop to the endemic corruption exposed so alarmingly in recent revelations.
2). Replace the majority of ministers and their acolytes who have been responsible for poor management and oversight of their portfolios, with able, well qualified and respected individuals.
The Finance and government owned enterprise clusters are two prime examples.
In addition crime and its investigative arm is also a prerogative. All these areas suffer from extremely poor oversight and management and any amount other tinkering is analogous to fiddling while Rome burns. Tackle the core problems and the citizens will rise to the occasion.

Not replace the majority of ministers – reduce the cabinet by 50% and then replace. The bloated government is one of the problems. Way too much focus on revenue and tax and way too little on saving on expenditure.

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