Challenge of attaining fiscal sustainability
Over the past five years, South Africa has experienced one of the weakest average growth rates in per capita gross domestic product among a range of emerging economies. This leaves the National Treasury with the challenge to increase revenue, as well as cut spending, in order to put the country on a path of fiscal sustainability.
Increasing revenue will be tough, as business and consumer conditions provide a tricky setting in which to raise additional taxes. South Africa’s relatively high corporate income tax rate (28 percent compared with a global average of 24.2 percent) and the government’s desire to attract foreign direct investment suggest little scope to raise corporate income rates further.
Similarly, an increase in personal income tax, the government’s largest source of revenue, would be difficult to implement in light of persistent consumer headwinds, including higher electricity tariffs, higher fuel prices, slower growth in nominal wages and rising unemployment.
Raising the rate of value-added tax (VAT) will also be a challenge. Even though South Africa’s VAT rate is comparatively low on a global scale, an increase now would come at a time when growth in household spending has fallen below 1 percent, compared to 2.8 percent when the VAT rate was increased in April 2018.
Advancing capacity at the SA Revenue Service to collect taxes, a decrease in tax evasion and fraud, and a restoration in tax morality provide potential to alleviate pressure on revenue collection in the coming years.
Subdued economic growth is unlikely to provide a boost in revenue prospects in the foreseeable future.
The weak momentum in the economy ultimately reflects chronic policy uncertainty, stretched government finances, infrastructure constraints and crushed confidence.
These factors will translate into a revenue collection shortfall versus the medium-term budget of about R14 billion for 2019/20 if VAT refunds normalise. Persistent tax revenue shortfalls in the past few years have materialised in spite of the implementation of additional tax hikes, including the 1percent VAT increase and an increase in taxes for the top personal income tax bracket in recent years.
Cutting expenses might be a bigger challenge than raising revenue in the current political environment. A bloated government wage bill and burdensome debt-service costs are crowding out more useful government expenditure. For every R1000 spent on consolidated expenditure, R340 is paid to civil servants.
Although an across-the-board wage freeze for civil servants is less likely, the government could potentially achieve a significant portion of its intended savings of R150bn, as announced in the Medium Term Budget Policy Statement in October 2019, through earmarking higher-income categories for wage freezes and bonus cuts, while implementing strict inflation-linked increases for the remainder. Whether there is the political will do this remains to be seen.
Over the past decade, South Africa has consistently spent more than what we have earned and this shortfall has been funded by debt. This has resulted in debt-servicing costs growing at an average of 13.5 percent a year for the past eight years, making it our fastest growing area of spending. Of every R1000 spent by the government, R115 is used to service government’s interest bill. The Treasury has warned that without further fiscal measures, spending on debt-service costs will outpace spending in areas such as health and community development by 2022/23.
Sanisha Packirisamy is an economist at Momentum Investments.