The revised Budget statement presented to Parliament by Finance Minister Enoch Godongwana on 12 March, proposing a new fiscal mix of spending, borrowing and taxing as a response to the previous opposition to the 2% rise in VAT proposed in the original Budget, diverges to some extent from the parameters outlined in the original Budget.
Prof Raymond Parsons, economist from the North-West University (NWU) Business School, says there was also a welcome emphasis on factors such as avoiding more borrowing, empowering the South African Revenue Service (SARS) to strengthen tax compliance, and expediting infrastructural spending.
He says the amended Budget seeks to strike a new balance between fiscal sustainability and economic growth. “The promised comprehensive spending review is a step in the right direction, but realistic timelines need to be set. Tough decisions on recalibrating government spending were nonetheless still needed in the amended Budget.”
Prof Parsons points out that future risks to the fiscal outlook remain, which the World Bank has also again emphasised recently.
“It has been the repeated failure over several years to adequately control government expenditure that eventually led to ever bigger budget deficits and a persistent rise in the key debt-gross domestic product (GDP) ratio, which is now expected to peak this year at 76,2% of GDP. Hence, on the tax front, although the VAT rate now rises to only 16% over the next two years, that may not be the end of the story, unless more strenuous future efforts are made to rein in the spending side of the Budget.”
According to Prof Parsons, South Africa now risks drifting into a negative tax-and-spend fiscal cycle, with eventually damaging economic consequences unless higher growth generates more tax revenues. In an effort to enhance investment and growth, the emphasis in the Budget speech on increased collaboration with the private sector is nevertheless welcome.
“Whether the Budget has done enough to ignite economic growth to eventually reach the overall target of 3% GDP growth in the GNU’s recent Medium Term Development Plan (MTDP) is not obvious. Given a more vulnerable external environment, the Budget assumption of 1,8% economic growth this year may also be too optimistic. As the Budget speech also emphasised, higher economic growth and a durable recovery in economic activity require a stable macroeconomic environment, complemented by rapid implementation of economic reforms and improved state capacity.”
Prof Parsons says an extra layer of uncertainty has, however, now inevitably been injected into fiscal policy by the fact that the Budget in its present form still has to be eventually voted upon and passed by Parliament.
“There is likely to be a further robust debate around amending the money bills in Parliament. The Parliamentary process will be a challenging one to see whether parliamentarians can improve on the fiscal mix in the Budget, as well as consider input from other key stakeholders in the economy.”
