SA is making only very slow progress towards the promised growth lift-off, and this week’s budget may well show the consequences.
At a time when there are pressures from all sides to spend more, on everything from social grants to defence to healthcare to more state-owned enterprise bailouts, government revenue could come in as much as R30bn lower than last February’s budget estimates for the current fiscal year.
Some economists think it might not be quite so bad. And the fact that departments across all levels of government consistently underspend — often on much-needed infrastructure projects — means the deficit might not be that much worse than October’s medium-term budget estimates, which showed slightly worse deficits and a debt to GDP ratio that stabilises at 75.5% in fiscal 2025/26.
But if the government wants to add new spending to the envelope it will have to find the money by borrowing or by taxing. Borrowing more is not a good idea at a time when the government’s interest costs already consume one-fifth of the revenue it collects, crowding out other spending and raising borrowing costs across the economy. That leaves taxes.
The National Treasury already tapped individual taxpayers for more in the latest year, raising about R18bn when it declined to grant any relief for inflation or “bracket creep”. Corporate taxes are already underperforming in a weak economy. Fuel taxes will surely have to go up after being frozen for three years. And if the government needs a lot of money in the coming year, the only other large tax lever it can pull is VAT.
From a tax policy view that’s the lever SA should be pulling. SA’s VAT tax burden is way below the average for emerging countries while its personal income tax burden is way higher. Nor should it be looking at zero rating more foodstuffs — the existing zero ratings already cost the fiscus upwards of R30bn a year. There’s no point giving with one hand and taking away with the other, especially since there is some evidence that the benefits flow more to the rich than the poor.
We trust that finance minister Enoch Godongwana will be completely transparent on the day about how bad (or good) the public finances are looking and that he will take a conservative view on the medium-term outlook rather than hoping for better times that may not materialise.
As the Treasury has said, it must rebuild the credibility it lost in the years when it kept missing targets. Credibility is even more essential now that SA faces a difficult world where sentiment could easily turn against it. So too is a firm commitment to stabilising the public debt, which has more than doubled as a share of the economy in the past decade. It will be a big test of the new government of national unity to get behind the fiscal consolidation strategy, however unpalatable some of the decisions involved might be.
It’s unhappy to have to cut spending as the government plans and/or raise taxes in a weak economy. Equally, a much stronger economy would make it a lot easier to square the fiscal equation and stabilise or even reduce the debt over time.
That is what the government must aim for. It is the best support it can give the budget.
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