The failures of labour relations in South Africa have ramifications way beyond employment and employment benefits. They influence share prices, credit ratings the rand and also fiscal policy, as we shall learn today.
The Treasury estimated in its medium-term budget policy statement last October that “the total value of production lost to platinum and gold mining strikes and stoppages since the opening of the year has amounted to about R10.1 billion. Declining mining output and the spread of strikes have depressed activity in related industries including manufacturing, logistics and services with negative consequences for gross domestic product (GDP), revenues, exports and employment.”
It is the lost revenue that will be the particular concern of the Treasury. The platinum and gold mining companies affected were not long ago among the most important contributors of corporate taxes.
They are no longer profitable. Companies contributed R152bn in company taxes in tax year 2011/12. The original estimate for 2012/13 was R167.8bn and was revised down marginally by R1.7bn to R166.1bn in the October estimate.
The dividend withholding tax is expected to add a further R18.8bn representing a combined 23 percent of all tax revenues of R821bn, which was also revised lower by the medium-term budget in October from the estimate of R826bn estimated in the February Budget.
The government’s share of the estimated R10.1bn loss in production and value add would be about 30 percent. If so we would be facing a further loss in revenue of between R3bn and R4bn assuming more widespread declines in value add.
This is hardly a train smash for the Treasury. Furthermore, not all local companies have been under profit pressure. Industrial companies listed on the JSE have reported very good growth in after-tax earnings a share, though it will be appreciated that not all of their activities, nor those of JSE-listed resource companies, take place in South Africa to help generate tax revenues.
By contrast the resource companies reported growth in earnings to January of a mere 1 percent and reported earnings were falling sharply and have continued to do so this year.
The medium-term statement revised upwards the estimate of the budget deficit to R156.5bn from the R127.4bn deficit in 2011/12, or 4.8 percent of GDP. This deficit is planned to decline to what is regarded as an acceptable 3.1 percent of GDP by the 2015/16 fiscal year. The Treasury will do all it can to avoid missing this target.
For the sake of the economy and its growth prospects we must hope that the recourse will be to slow down the growth in government spending rather than to look to higher tax rates on company or personal income to close the deficit.
The problem for the Treasury and the economy is that there are few high-income earners who already pay a very high proportion of the income tax collected.
The 277 000 income tax payers who are estimated by the Treasury to report taxable incomes of more than R600 000 in 2012/13 – a mere 4.5 percent of all income tax payers, earning 21 percent of all reported taxable income – already contribute over 37 percent of all income tax.
Adding to their burden may well produce less rather more income tax as they find further ways to pay less tax or, worse still, opt out of the economy altogether.
The combination of high tax rates and minimal benefits that the high tax payers gain from government spending is not a recipe for competitiveness.
Nor are the effectively high taxes paid by companies compared with their rivals offshore, which benefit not only from lower company tax rates, but more generous tax expenditures. The tax system is highly redistributive in its mix of taxes and lack of service delivery, for which high-income earners expensively substitute private health, security and education.
The solution to the problem that slower-than-anticipated growth in revenue brings to the fiscal deficit and the extra debt the government has to issue, is to slow down the growth in government spending, especially on those who work for the state.
The government in its Budget plans intends as much. The growth in government spending and revenues has been extraordinarily fast in recent years. Government expenditure has been growing at an impressive 10 percent real rate with revenue collections more than keeping up the pace of real growth in spending.
The government has made very clear its intention to slow down this growth and in particular the growth in compensation paid to government employees as we show below. The plan is to bring the Budget into primary balance by 2014/15 – with revenues equal to government expenditure, net of interest payments.
If successful this would mean that government expenditure and revenue would be restricted to a growth-encouraging 28 percent of GDP. This share of the economy appropriated by government would provide much room for the economy to grow. If the government has been able to stick to these plans in 2013 by holding down the growth in government spending and not increasing the personal or company tax rates, the 2013/14 Budget will make a major contribution to the growth prospects of the economy.
If it has failed to do so and relies more on raising revenue than reducing spending to close the deficit it will have failed in its duty to the economy and no doubt will be judged accordingly in the market place.
Brian Kantor is the chief economist at Investec.