Two per cent will never be enough
If the South African economy continues to grow at a pedestrian 2% per annum from today until net zero day in 2050, then we can be certain of three outcomes: our unemployment rate will expand to 37% by 2030; to 40% by 2030; and to 45% by 2050… It saddens me, dear reader, that I always bring such negative tidings, but the purpose of this jarring opening line is to scream from the rooftops that South Africa needs extensive and immediate structural reforms to elevate our economy to the 4-5% annual GDP growth that is needed to make a meaningful long-term dent in its unemployment measure.
Glaring red fails aplenty
This chilling forecast was one of many stomach-churning economic realities shared by Isaah Mhlanga, Chief Economist at Alexander Forbes, during his 2022 Economic Update and Budget Preview presentation. Mhlanga also reminded the audience that government had made slow progress towards implementing the reforms listed in the 2021 State of the Nation Address (SONA). “Only three of the 26 action items that we have been tracking since then have been achieved on time; and we have five action items that have been completely missed,” he said. To make matters worse, 2022 is an ANC election year, which suggests that we can expect more slippage as Cabinet Ministers become distracted by party political matters.
Today’s ‘two per cent will never be enough’ headline is a slight misdirection, because it is not my intention to unpack South Africa Inc’s macroeconomic prospects. Rather, I wanted to prewarn FAnews readers about what to expect when the Minister of Finance delivers his 2022 National Budget later today for this year. And my scathing opening paragraph is intended as a plea to both the Minister of Finance and National Treasury that they practice the fiscal discipline needed to get our beloved country back on track. Another request is that our financial policymakers refrain from using the country’s higher-than-expected tax revenue collections during 2020/21 and 2021/22 to trick us into believing that things are better than they really are.
“We should expect a really good budget as far the fiscal consolidation path that was tabled during the most recent Medium Term Budget Policy Statement (MTBPS),” said Mhlanga. “National Treasury will benefit from somewhere between R160 and R180 billion in additional tax revenues relative to last year’s budget, which will reduce some of the risks around public sector wage settlements and the extension of the Covid relief grant”. The tax collection windfall is largely due to strong commodity prices which look set to receive a continued boost as China reflates its economy through 2022/23. Sadly, this rosy revenue collection outlook has fooled many commentators into believing that South Africa can afford to introduce a universal Basic Income Grant (BIG).
BIG enough to fail, every time…
Not so fast, warns anyone with even a drop of economic nous. Analysts and economists were warned against making cash flow forecasts as if the reforms announced during National Budgets and SONA are a done deal. You need only read my latest mutterings on SONA 22 to get a sense of things. “We would be naive to think we are going to get a robust implementation of the economic reforms [necessary to deliver] 4-5% growth; and at 2-3% growth, BIG would become a permanent burden on the fiscus … we would end up with a Scandinavian-type welfare state in a country that cannot generate a high enough economic growth,” said Mhlanga. He added that one of the positives of the R350 per month Covid relief grant extension was that it kicked BIG down the road, for now.
Mike Teuchert, National Head of Taxation at Mazars South Africa, opined that government should consider BIG in light of its potential impact on the country’s unemployment crisis. He is among the many commentators who believe that this type of grant should require some sort of offset from its recipients. “There has to be a mechanism that allows the government to incorporate unemployed individuals into the real economy, which involves creating jobs and instilling a sense of pride in South African people who can work and earn a living; this is of course part of a bigger debate,” he said, during a Mazars virtual roundtable discussion focused on the upcoming budget. The writers view: perhaps BIG should be implemented as part of the Expanded Public Works programme instead!
At present, the economic indicators suggest that the Minister of Finance will have to tighten the country’s purse strings rather than add to its welfare bill. Mhlanga pointed out that South Africa’s debt profile remained unsustainable, despite improvements. And at the levels of GDP growth pencilled in to the MTBPS, our debt-to-GDP ratio remains stuck in a moderately worsening trend until 2024/25, where it hits 77.8% from around 70% for 2021/22. “As far as the fiscus is concerned, we think it will look better than what last year’s November MTBPS had tabled,” he said. “But there are significant risks linked to further funding requests from State-owned Enterprises (SOEs) and suggestions [from certain quarters] that the State should take on part of Eskom’s debt”. Another alarming development is the payment of public sector wages by stealth, through a cash gratuity structure in addition to wages.
So, what can you expect by way of new taxes?
Mazars was adamant that “the road to a healthier and sustainable fiscus and economy should not be paved with increases in personal taxes or the VAT rate, although both these eventualities remain on the horizon of public discourse”. It is, however, unlikely that major increases in the corporate and / or personal tax burden will be pushed through so soon after pandemic. That said, Treasury might toy with the introduction of a higher VAT rate on luxury items or totally new taxes on items as diverse as crypto assets and vaping. “With regards to emerging industries like cryptocurrencies, much guidance is needed to navigate the grey areas; we are yet to see government take decisive action in this regard,” noted Althea Soobyah, Director of Tax Consulting at the firm.
The Finance Minister faces a tough task of managing down the country’s debt during an ANC election year. Fortunately for him, he will be able to absorb any public sector wage creep from the tax revenue overruns, already mentioned. But there are significant pressures from planned and proposed welfare projects such as BIG and the National Health Insurance (NHI). Sadly, the best laid plans will come to nought if South African cannot achieve the 4-5% annual GDP growth needed to turn the unemployment tide. And that could be tough in the current context. “We are almost in a stagflation situation,” concluded Mhlanga. “South Africa faces low growth and high inflation combined with rising interest rates, which is not conducive [for growth] … this is a very tough environment for ordinary citizens”.
Writer’s thoughts:
The ongoing talk about BIG and NHI gets this writer’s blood boiling! Why, for example, do we push ahead with grandiose welfare schemes when we cannot get the economy fired up. After all, what better way to implement BIG than to strive for full employment? Do you want to National Treasury and the Minister of Finance to introduce more taxes to expand the country’s welfare net, or rather introduce pro-business policies to encourage economic growth? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
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