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A budget of last resorts is upon us

21 February 2018 FINANCE


‘I see the clock upon the walls. But it doesn’t bother me at all, these are ever-changing times…’ (M McDonald & A Franklin, 1991)

By Khaya S Sithole

The 2018 budget speech to be delivered by Minister Malusi Gigaba is perhaps the most important address he will ever deliver to the nation. It is essentially his first full budget since he was appointed as the Minister of Finance in the night of the long knives last March. Since then, the tides of time have rapidly altered our political and social landscape.

When last year’s budget was delivered, Minister Pravin Gordhan outlined the bleak state of public finances which has essentially been getting worse over the past 10 years. In spite of that, as a Minister with the gravitas and clout with the various stakeholders – the political parties, market participants and society – he could manage to convince us all that the state of public finances could be rescued in the long run if the right decisions were taken.

Unfortunately for us, the decisions taken from that moment represented a motley crew of political and administrative chaos that led to a paralysis in the country’s economic cluster.

All the things that Pravin Gordhan had put on his wish list – rooting out corruption in the public sector, policy certainty, fixing state enterprises and good governance across the board – either never materialised or were not adequately monitored. In addition, he himself lost his job as the Minister in March 2017.

Malusi Gigaba therefore inherited a cocktail of issues that quite simply could not be fixed within a short time. Moreover, it became gradually clear that such a fixing exercise was intimately connected to the question of who the ultimate political principal was. As a result, by the time Minister Gigaba had his first bite at disclosing the state of the nation’s finances in the October mini-budget, he revealed a picture of the fiscus that turned out to be much worse than what Pravin Gordhan had articulated months earlier. And to top it off – Minister Gigaba also revealed that the gaping hole in public finances caused by the revenue shortfall was around R50 billion. And even more tragically for Minister Gigaba, he also had to inform the country that the state enterprises that Minister Gordhan had spoken of months earlier – needed more bailouts from the taxpayer in order to survive.

With that in mind, one assumes that the job that has been happening at National Treasury since then in order to prepare for today’s budget has been less than easy. Not only was a new Minister the political principal but we also had a new administrative principal – Mr Dondo Mogajane – after the abrupt departure of the previous head Lungisa Fuzile and then later, the head of Budgeting Mr Michael Sachs.

If these were the only issues at hand then perhaps National Treasury would say – ‘it is tough, but we will manage’. But it got tough, much tougher after December.

The Budgeting process in South Africa is a lengthy and bureaucratic war of attrition. In its simplicity, the various departments and provinces participate in a series of meetings aimed at identifying the spending needs of each sphere of goverment. After much haggling and arm-twisting due to the limited resources available, concessions are made here and there and the final budget framework is designed to make everyone equally disappointed and universally content.

When this process started in the middle of 2017 it was based on the benchmarks set in the prior budgeting cycle. What that budgeting process would not have factored in are the resolutions taken by the ANC at Nasrec. The most important ones – the rollout of higher education and a greater urgency in land reform – are possibly the most important budget lines to watch out for today. In relation to land reform, the main conversation since Nasrec has centred around the Constitutional amendments that are apparently required in order to speed up land reform.

The reality however is that the land reform process currently has 2 problems – the administrative problem and the legal/constitutional problem. In the administrative side, the government quite simply hasn’t allocated enough resources to implement existing land reform initiatives within the ambit of existing legislation. With the Nasrec resolutions having injected a greater sense of urgency in the land debate, the government has to live up to the rhetoric and take the first steps towards addressing land reform in a more radical manner by dramatically increasing the budget allocation for land reform. This can take place today as it deals with the administrative lethargy that exists in current land reform initiatives. The question of amending the Constitution is the legal issue that will naturally take a longer period of time to resolve. So my first expectation is that the budget will make mention of the land issue and either commit greater resources to it or give indications of how this will be done.

For the higher education issue, the Nasrec announcement by former President Jacob Zuma implicitly rejected the findings of the Heher Commission and the Nxasana Ministerial Task Team reports which advocated for a loan system in one form or the other. Rather, the Presidency adopted a grant system for students from families whose income is below R350 000. At that stage, there was a lack of clarity about what the actual financial implications of this groundbreaking decision would be. As National Treasury has had over 8 weeks to deliberate on the matter, it is expected that this will be the most anticipated aspect of the budget. The amount allocated to the rollout of free higher education for 2018 will not only provide clarity to all stakeholders about the 2018 situation but also provides a useful guideline of how much the full rollout will eventually cost.

A third area of interest that I will be watching closely is the reforms around the health sector. I have advocated for the abolition of the current medical schemes rebate in order to assist in funding the rollout of the National Health Insurance. The current rebate system tends to favour citizens who are part of the private healthcare system and – unfortunately in a developing state – appears to be undesirable when the country is struggling to find resources to improve public healthcare. I therefore expect the budget to reveal how we will gradually curtail the rebate system even if it’s not an overnight abolition of the system altogether.

The big elephant in the room today is naturally the fact that all that has been mentioned above relates to the expenditure side of the budget. The bigger problem is that the country faces a major revenue problem. In the upcoming budget, the focus will need to be more on the revenue aspects that are needed to fund the programmes of this administration as it meanders towards the end of the fifth Parliament. The question of how the money will he raised is the Finance Minister’s greatest conundrum today. Personal income tax sounds good on paper but with a stagnant taxpayer base and a marginal rate of 45% already, this avenue has quite simply been exhausted as an alternative. Any changes relating to personal income tax are unlikely to make a dent in not only the desired revenue targets but also the R50 billion shortfall we already have. Annually the tax brackets are adjusted marginally to compensate for the effect of inflation. However, even if that practice is suspended in today’s budget statement it will not – on its own – assist in raising the tax revenue we need.

 

A lesser-explored area of possible adjustment is the corporate income tax level which currently is at 28%. Whilst this is regarded as low by some commentators it is important for us to appreciate the discretionary nature of private enterprise. In other words, increasing tax rates raises the possibility that such enterprises might regard the rates as punitive and onerous and therefore curtail their spending patterns which then has long-run impacts on unemployment and growth at large. The best one could hope for from today’s budget is a bump up to 30% from the current 28%. The government could take the gamble of saying even though we understand the negative implications in the long term we think the urgency warrants that we act now. It would be painful but palatable.

The reality is that one avenue has the capacity to address the fiscal gap better than all the other options on the table. This would be VAT. The current standard rate of 14% is not high when compared to some key trading partners. A 1% change in the standard rate could raise over R20 billion on its own. The problem with VAT however, is that the reason it has not been touched since 1993 is that is has broad implications for everyone who is part of the economic ecosystem. In political terms – it impacts the poor and the rich and should therefore be increased only as a last resort. Minister Gigaba might as well have figured out that now is indeed the time to explore our last resort. If he can do that today he will get some breathing space financially. Politically however, it will be a tough task convincing the various social partners – labour, the unions etc – that this is the way to go.

Unfortunately the clocks on the wall are ticking and these difficult conversations can no longer be deferred.

One can only wish the Minister all the best in this Budget Speech. Or perhaps he could surprise us all and pull a rabbit out of the hat – how about a new graduate levy there to fund Higher Education Minister?

 


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