Economists warn against “chaotic budget cuts”

We’re not facing an immediate fiscal crisis, says Institute for Economic Justice

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The Institute for Economic Justice has cautioned against Minister of Finance Enoch Godongwana (pictured) against “chaotic budget cuts”. Archive photo: Ashraf Hendricks

“Chaotic budget cuts” are not the answer to the shortfall between tax collections and government spending, the Institute for Economic Justice has warned.

In guidelines issued to national and provincial departments on 31 August, the National Treasury pointed to an “exceptionally large” drop in tax revenue of R22-billion for the first five months of the year. The Treasury said borrowing conditions for the government were tough, and the public sector wage increase hadn’t been fully budgeted for. As a result, the Treasury instructed government departments to make some cost cuts for the rest of the year.

But in a report issued ahead of the Minister of Finance’s budget policy statement on 1 November, the IEJ says the shortfall isn’t extraordinarily large and there are ways to fix it without “chaotic budget cuts” which will hit the economy hard.

The fiscal crisis “is being exaggerated for political purposes”, say authors Gilad Isaacs, Zimbali Mncube, Liso Mdutyasna and Kamal Rambuth.

They estimate the revenue shortfall for the financial year at about R67-billion, in line with the Treasury’s figures. Mostly, the slower tax collections are the result of a slump in mining, which had contributed a bigger and bigger chunk of corporate taxes in the last few years. Taxes paid by firms in other sectors, and income tax paid by individuals, have been in line with expectations. And the revenue shortfall is not abnormally high, they say, pointing out that shortfalls of R61-billion, R58-billion, and R70-billion were recorded in 2017, 2018, and 2019.

On the spending side, much of the overspend is the result of the R37.5-billion public sector wage bill hike for which the Treasury should have budgeted, they say: “if this overspend is a ‘crisis’ then it is one entirely of National Treasury’s own making”.

The current budget mismatch “can be solved relatively easily,” they say, proposing a series of options to raise revenue:

To fix the immediate shortfall they propose that the government:

  • Move money from the Gold and Foreign Exchange Contingency Reserve Account, which is the account in which the Reserve Bank records profits and losses from foreign exchange transactions by the government. R459-billion in this fund is owed to the government, the economists say; and
  • Borrow more. In 2022-23 South Africa’s debt was at 71% of gross domestic product, which is in line with the average of 69% for comparable economies. And even if the whole budget mismatch was covered by borrowing, the debt to GDP ratio would barely change, they say. Though in the long term South Africa’s debt trajectory is a concern, current levels is not at “crisis” levels.

To raise additional revenue next year they propose that the government:

  • Raise taxes (but not VAT, which has a disproportionate effect on poorer people)
  • Drop some tax breaks to high earners, especially for private pensions and medical aid (individual tax breaks amount to R305-billion and cutting some of these could raise upwards of R50-billion, they say;
  • Re-evaluate corporate tax subsidies;
  • Raise company tax back to earlier levels (it was cut from 28% to 27% in 2022). This is unlikely to discourage investment, they say, because investors are more interested in reliable electricity, good port and rail services, a safe environment, a skilled work force than in a slightly higher tax rate; and
  • Reduce the cost of borrowing by moving to shorter term loans which are cheaper, and renegotiating the terms of loans

In the medium term they say the government should:

  • Consider a wealth tax; such taxes have been used in other countries in times of economic crisis and if the Treasury really believes this is a crisis, it would be a good time to introduce a wealth tax, they say; and
  • Reintroduce some form of the old “prescribed asset” policy in which retirement funds had to invest a proportion of their assets in government bonds (effectively lending to government). This would mean safe, guaranteed, returns for the investors and cheaper borrowing for the state.
TOPICS:  Economy

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Dear Editor

Treasury does not own or control the Reserve Bank. The balance referred to at the Reserve Bank does not refer to a balance that consists out of cash. It is also not an asset we can sell to get cash.

Secondly - the tax amendments proposed will not realize additional taxes. Company taxes at 27% of R0 or a loss, equals R0. 28% of R0 or a loss equals R0. Therefore no tax increase.

The pension funds are already used as you propose they should be used.

We already have a wealth tax, it is called capital gains tax. It is already in place. It will also not incur more income, and this is why: Our problem is that we can only sell and produce a maximum number of goods per month due to the Eskom and Transnet crises. This means that the max amount of money we get is effectively now controlled by the government, and they have limited it.

We have appointed people with a lot of education to do these calculations for us. They are telling us there is no more money. They are not doing it because they do not know how to do their jobs, they are doing it because they understand precisely how to do their jobs.

The RSA Rand represents at most the foreign funds we earn. This is because our money is not represented by gold deposits in the reserve bank. Due to this, the problem with both Transnet and Eskom actually means that we are running out of money and cannot earn more. This becomes a very real problem because we cannot borrow more funds at rates we can afford. This is not an assumption: the bond interest rates is there for anyone to go and look at.

Our Rand is falling because foreigners have figured out the above, and are now removing their investments. The proposal from Treasury is the only solution that will fix this problem without causing our Rand to collapse.

I wish we could implement your solution. It would have been nice. If we can fix Eskom and Transnet, and implement the budget cuts, we might get through this.

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