South Africa Budget: Nene’s focus on fiscal consolidation

27-million people in South Africa live below the poverty line, according to StatsSA figures released this month [Xinhua]

Fiscal consolidation will be the theme when South African Finance Minister Nhlanhla Nene unveils the 2015/16 Budget on February 25 at noon GMT as slow economic growth has curtailed revenue streams, while a contra-cyclical fiscal policy has resulted in an unsustainable rise in government expenditure in Africa’s biggest economy.

Trade data will be released on Friday.

Real gross domestic product (GDP) growth slowed to 1.5 per cent in 2014 from 2.2 per cent in both 2013 and 2012 and 3.2% in 2011 according to Statistics South Africa data released on February 24. In the October 2014 Medium Term Budget Policy Statement (MTBPS), Nene indicated that the Treasury would be looking for additional revenue of R12 billion in 2015/16 and R15 billion in 2016/17 from enhanced tax collection efficiency and changes to tax policy.

Sanlam Investments economist Arthur Kamp noted that a one percentage point increase in the Value Added Tax rate from 14 per cent to 15 per cent would more than meet the Treasury’s objective for the coming fiscal year.

Kamp said that “On the one hand, fairness dictates South Africa’s tax structure should be progressive. This suggests taxing higher income earners more. On the other hand, poverty cannot be reduced unless the economy grows fast. This requires less emphasis on taxing income.”

He suggested that in order to align itself with the growth objective the tax structure should be supportive of investment. This implied a greater emphasis on higher taxes on spending and lower taxes on income. Taxes on spending (indirect taxes) restrict consumption in favour of savings. Taxes on income reduce the incentive to work, save and invest. South Africa’s tax structure is skewed towards direct taxes, which contribute some 55 per cent to government revenue.

Investec economist Anabel Bishop expected a rise in the marginal tax rate by one percentage point, a hike in the fuel levy by 50 cents per litre, higher excise duties on alcohol and tobacco, higher custom duties for luxury goods and an increase in the Capital Gains Tax rate to 50 per cent.

She noted that individuals account for 34 per cent of the tax revenue in South Africa with VAT providing 26 per cent and company profits 20 per cent, but as there were only 498 864 individuals earning over R500 000 per annum out of a total population of 54 million, higher income taxes would slow economic growth.

“Instead, the true cause of lower tax revenues needs to be resolved, namely prolonged strike action, electricity supply constraints and the undermining of private corporate sentiment through the erosion of private sector property rights and reduction of free market policies,” she wrote.

Barclays economists Miyelani Maluleke and Peter Worthington warned of two risks to the government’s expenditure plans.

“The first is the public sector pay negotiations, where unions continue to demand a lot more than Finance Minister Nene allowed for in the MTBPS. The second is the contingent fiscal needs of state-owned enterprises (SOEs) such as Eskom and South African Airways, which may override the government’s commitment to financing them only in a deficit-neutral way through the sale of state assets,” they wrote.

Nedbank economists Dennis Dykes, Isaac Matshego and Nicky Weimar noted that the Minister already indicated that tax policy over time will be adjusted based on the recommendations of the Davis Tax Committee, which should hopefully not undermine the pace of economic activity or punish and distort savings and investment behaviour too much. On the expenditure side, constraint and efficiency will remain the key themes, with a focus on shifting spending towards addressing some of key structural constraints to higher economic growth.

 

Helmo Preuss in Pretoria, South Africa, for The BRICS Post