Spending more than we earn: Tax experts weigh in on issues raised by Tito Mboweni
CAPE TOWN – The downward adjustment on South Africa’s growth expectations announced by Finance Minister Tito Mboweni when delivering the country’s 23rd Medium-term Budget Policy Statement (MTBPS) is a rather bitter pill to swallow.
The Finance Minister told Parliament on Wednesday that the country’s growth expectations now stood at 0.5 percent of gross domestic product (GDP), compared with 1.5 percent anticipated in February.
This was one of the most alarming takeaways from the MTBPS, according to Jameel Ahmad, FXTM global head of currency strategy and market research. Ahmad said this did nothing to help investor sentiment because it painted the same old picture that the South African economy would continue to underwhelm.
Mboweni was hailed for painting a true picture of the state of the country’s economy despite worries about market reactions to the country’s ballooning debt. This year’s national debt exceeded R3 trillion and is expected to rise to R4.5 trillion in the next three years.
With this year’s revenue gap predicted to be around R53 billion, the minister’s report on the state of revenue collections has painted a grim picture of the years ahead for the fiscus. With this in mind, two of Mazars’ tax experts weighed in on the key issues raised by Minister Mboweni:
Mike Teuchert, National Head of Taxation at Mazars:
National debt escalating
One of the most concerning points raised in MTBPS 2019 is the issue of the national debt, which is in serious danger of careening out of control if government does not take decisive action. Debt service cost is the most rapidly growing area of national expenditure. What is concerning is that the gross national debt was around 51 percent of GDP only three years ago, which is now predicted to reach 71 percent of GDP within the following three years – and thereafter it continues on an upward trajectory. This is clearly unsustainable which will require a serious intervention to rectify.
Proposed cost saving brings hope
On a positive note is the emphasis that the Minister seems to be placing on cost savings. Proposed measures like the freezing of salaries for politicians, review of subsistence allowances for top-level government employees over the next few years and downgrading their flights to economy class is certainly sending the right message to the South African public. In addition, he has also highlighted that the growth in the public wage bill needs to be brought in line with inflation. Time will tell whether there is enough political will to implement these measures with the desired outcome.
Graham Molyneux, Tax Partner at Mazars:
Economic growth decline exacerbates Treasury’s problems
The fact that economic growth has been regularly revised downwards is extremely troubling. Growth forecast has been revised downwards from 1.5 percent to 0.5 percent. It is definitely one of the key reasons why revenue collection is expected to only reach R1.37 trillion this year – well short of the R1.42 trillion target. The projected revenue is around 4 percent less than Treasury’s revenue goal for the 2019/20 financial year, and it remains to be seen whether this revised target will indeed be met by February next year. It directly affects some the biggest sources of revenue, namely VAT, personal income tax and corporate tax. As long as the economy continues to perform poorly, revenue collection will be under severe strain.
Another important issue to note, is that non-interest spending in the current year is also projected to be up by a net R23 billion, and the Minister attributed this in no small part due to Eskom’s financial situation. In fact, according to the Minister, Eskom is responsible for R26 billion of non-interest expenditure in this year – and other SOEs account for a further R10.8 billion. As the Minister says, we are simply spending more than we earn.