The leeway available to finance minister Pravin Gordhan for the 2013/14 budget was very narrow, due to falling revenue and a sluggish economy that has seen South Africa’s debt grow at a great rate since the 2008 global economic downturn.
The peril has been so acute that all three major international credit rating agencies downgraded the country’s rating in recent months. His speech needed to strike a good note with the agencies and investors by showing that South Africa still had it together financially.
The country is stuck in an awkward situation: the global economy has slowed down drastically, meaning that the South African economy has also grown at a sluggish rate. At the same time, spending has not been curbed significantly. Thanks to that, the government budget balance (as a percentage of the gross domestic product) fell from -1.2% in 2008/09 to -4.4% in 2013/14. According to ratings agency Fitch, national government debt will have risen to 41% of GDP (around 43% including local authorities) at end 2012 from 27% at end 2008. The Democratic Alliance claims that government debt over the medium term and when contingent liabilities are included now extends beyond 50% of GDP.
There are three ways to get out of such a debt hole: rapid economic growth, higher taxes or lower government spending. The answer is usually found somewhere in the middle, but not even Gordhan’s best prayers can affect the global economy to our advantage just like that. That leaves two levers for him to tug at.
One of the biggest fears about Wednesday’s budget speech was that Gordhan would raise taxes to fund expenditure because the slow economy meant that tax collection fell. But raising personal income or company taxes would result in job losses and a smaller pool of taxpayers, setting off a downward spiral. Raising value-added tax would hit the poor the hardest and go some way to negate the good work done by government’s social grants system.
However, taxes were ultimately not raised in the way that was feared. But it isn’t true to say that taxes weren’t raised at all. And a new tax regime could be on the horizon, as President Jacob Zuma and Gordhan announced that a tax review panel, headed by Judge Dennis Davis, would soon start its work. The terms of reference are expected in March.
While announcing a R7 billion personal income tax relief for the year, Gordhan also adjusted the tax bracket by 3% – about half the rate of inflation. This effectively means that the average person will be paying more tax than they did last year because of fiscal drag, according to Deliotte’s director for tax, Billy Joubert.
Fiscal drag occurs when a government’s net fiscal position (spending less taxes) fails to cover the net savings desires of the private economy. This depressed aggregate demand leads to deflationary pressure, or ‘drag’, on the economy. In our case, what we’re seeing is that our progressive taxation system automatically moves people into a higher tax bracket when their salaries are adjusted for inflation. If the government chooses to adjust the tax bracket at a lower rate than inflation, it means people end up paying more tax every year, even if it isn’t ‘raised’ as such.
Joubert said that Gordhan was well aware of the various pressures facing the country, and that the 2013/14 budget was a conservative and pragmatic one. “I think he did the appropriate thing,” he said.
“For the current year, there is no significant tax improvement. But there are new forms of tax coming soon, like the carbon tax which is coming in 2016, I believe, and the National Health Insurance scheme after that,” he said.
Joubert believes that the NHI will be paid for using either Pay-As-You-Earn or value-added tax, since company tax collection only went up by 3% – much less than the rate of inflation. “In real terms, companies have gone backwards,” he said.
He noted that Gordhan had cut back on government spending in the sense that ministerial budgets had been reined in. Also, the improvement in social grants this year has been slower than the inflation rate. However, the government needs to get serious about cutting back on corruption, as the auditor-general estimates that some departments lose up to 40% of their budgets due to corruption and maladministration.
“The tax base has been broadened, but we have got to focus on the expenditure side [cutting spending and waste] and then hope that the global economy turns around,” Joubert said.
The Democratic Alliance shadow minister Tim Harris agreed – but said that some solutions to economic growth were closer at hand than the ANC government would have us believe. If South Africa were to trade more robustly with the rest of the continent, our economy could grow at rates associated with emerging economies, which would be more than double the current rate.
“It is not feasible to be calling ourselves integrated with Africa when we still have exchange controls. We should be dropping red tape and trading far more on the continent,” Harris said.
However, he praised the idea of economic special zones, where lenient tax regimes will apply.
“I really like what’s on the table for economic special zones. If all the ideas are actually implemented, that would be great. This is essentially DA policy of incentives,” he said.
Harris also praised Gordhan for not raising taxes. But instead of passively waiting for the global economy to turn around and lift the South African one, he said that the government had it in its hands the chance to boost growth by modifying policies.
A more aggressive and growth-orientated approach by government would be welcome, especially in the face of looming tax burdens. The possibility is that the economy will turn around just as the carbon tax and NHI tax regimes come into play. Certainly, that’s what Gordhan seems to be banking on, with new taxes and the supposed peak of over debt-to-GDP ratio coming in 2015/16. But there’s every possibility that fate will play a cruel joke on us all by keeping the global economy sluggish until later than that. If we thought we had little room for cleverness in this year’s budget, those years could prove to be the really tough ones. DM
Photo: South Africa’s Finance Minister Pravin Gordhan gestures during his budget speech in this picture provided by the Government Communications and Information Systems in Cape Town February 27, 2013. REUTERS/Kopano Tlape/Government Communications and Information Systems (GCIS)
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