Fiscal consolidation could no longer be postponed, Finance Minister Nhlanhla Nene told lawmakers on Wednesday, while also announcing a R25-billion lowering of the expenditure ceiling and flagging plans to raise an additional R27-billion through higher taxes in the coming two years.
Delivering a sobering maiden Medium-Term Budget Policy Statement (MTBPS) address in Cape Town, the Minister said the country had reached a “turning point”, whereby revenue was insufficient to cover expenditure, while debt levels had reached the limit of what was sustainable. Over the next three years, government’s gross debt stock was projected to increase by R590-billion, bringing total debt to R2.4-trillion.
Somewhat surprisingly, Nene was able to sustain the deficit promises made in February by his predecessor Pravin Gordhan, with the MTBPS forecasting the 2014/15 deficit at 4.1% of gross domestic product (GDP).
The figure was better than many had been expecting, with a number of commentators anticipating that it could slip to levels of worse than 4.5%, owing to weak economic and revenue growth. The Budget deficit was projected to fall to 3.6% in 2015/16, 2.6% in 2016/17 and to 2.5% in 2017/18.
The deficit projection was sustained despite a R10-billion downward revision in its gross tax revenue for the year, with revenue expected to come in at R956-billion in 2014/15 – that would be R153.2-billion less than budgeted expenditure of nearly R1.14-trillion.
Also sustained were Gordhan’s calls for belt-tightening, with travel expenses, catering and the use of consultants highlighted as key areas of focus. "These steps will contribute savings of about R1.3-billion over the next two years," Nene announced.
He also outlined a five-part ‘fiscal package’ to narrow the deficit and stabilise debt, which included:
• Reducing growth in spending, by lowering the 2014 Budget expenditure ceiling by R25-billion over the next two years.
• Adjusting tax policy from the 2015 Budget to generate additional revenue of at least R27-billion over the next two years.
• Strengthening Budget preparation to emphasise longer-term planning and efficient resource allocation.
• Freezing government personnel headcounts and reviewing funded vacancies.
• And adopting a deficit-neutral approach to financing State-owned companies.
The 2014 Budget limited non-interest expenditure to R1.028-trillion in 2014/15, R1.106-trillion in 2015/16 and R1.184-trillion in 2016/17. But government aimed to reduce the ceiling by R10-billion in 2015/16 and R15-billion in 2016/17.
Nene dismissed assertions that it was an “austerity” package, noting that expenditure would continue to grow in real terms by 1.8% a year.
However, he acknowledged that the pace of expansion would slow materially, which would cause some pain. The intervention, though, was described as necessary in order for South Africa to rebuild the fiscal space it required to tackle its social and economic challenges.
The MTBPS indicated that decreases to the baseline would be felt proportionately across national, provincial and local government, according to their share of national revenue. “All government departments and agencies would need to reduce inefficiency and waste, and minimise the impact on front-line service delivery, by targeting non- essential items and uncommitted resources,” the document said, while stressing that spending on “core social obligations” would be protected.
To facilitate a “structural increase in revenues” tax policy and administrative reforms would be pursued to raise at least R12-billion in 2015/16, R15-billion in 2016/17 and R17-billion in 2017/18.
Details, Nene said, would be announced in the February Budget and would enhance the “progressive character of the fiscal system, improve tax efficiency and realise a structural improvement in revenue”.
Moderating expenditure growth, combined with tax measures to increase revenue, would improve the fiscal position by R22-billion in 2015/16 and R30-billion in 2016/17, the MTBPS indicated.
Deliberations on the possible changes were being guided by the Davis Tax Committee (DTC), which is led by Judge Dennis Davis.
The DTC was established in 2013 to assess South Africa’s tax policy framework and its role in supporting the objectives of “inclusive growth, employment, development and fiscal sustainability”. It had already delivered some reports and Nene said its final recommendations would be made in reports that were due in November and January.
Ahead of the MTBPS, Davis indicated that South Africa’s current financial balances were both precarious and unsustainable and that further slippages in the Budget deficit would have serious implications for South Africa’s credit rating and for the level of interest payments.
He warned, though, that every possible tax reform had its problems, while indicating that it was particularly keen to close the gap between the effective and nominal rate of tax paid by companies. South Africa’s nominal corporate tax rate was 28%, but between 2005 and 2011, the effective tax rate for all sectors was only 18.2%, while it was only 13.7% for the mining sector.
Nene stressed that the short- and long-term implications of the tax proposals for economic growth and job creation would be a key consideration.
As expected, the National Treasury lowered its economic growth forecast to 1.4%, from 2.7% in February. It was also only forecasting growth of 2.5% in 2015, 2.8% in 2016 and 3% in 2017, which was well below the 5% aspiration set out in the National Development Plan (NDP).
But even this modest growth outlook faced several domestic and external downside risks, ranging from further delays to dealing with the country's electricity shortages through to a hostile labour relations climate and vulnerability of the economy to a slowdown in financial flows, owing to its large current account deficit. The current account deficit was expected to be 5.6% of GDP this year and remain above 5% over the three-year period to 2017.
Nene acknowledged that South Africa’s economic performance had deteriorated over the past several years and that GDP growth was forecast to improve only over the medium term as infrastructure constraints eased, private investment recovered and exports grew.
Faster economic growth remained a core policy objective, notwithstanding a far less expansionary Budget policy and Nene said growth could be supported by sustaining high levels of public investment, reducing consumption expenditure and expanding exports on the back of a more competitive real exchange rate.
“Government acknowledges that the proposed measures may have a dampening effect on economic growth in the short term, but they are essential to sustain investment and revive growth over the longer term. In combination with structural reforms already under way, restoring fiscal stability can open a new period of investment-led economic growth,” the MTBPS added.