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Recently released research from the Institute for Economic Justice argues that the widely publicised “fiscal crisis” has been exaggerated by the National Treasury to pave the way for across-the-board budget cuts and that there are much better alternative policy interventions available.
THE EXTENT OF THE REVENUE SHORTFALL
Commentators have stated that South Africa’s revenue shortfall could reach R80 billion. While it is true we may see a revenue shortfall, our calculations show that it is below this figure.
This is still in line with historical trends. In 2017/18, 2018/19 and 2019/20, revenue shortfalls ranged from R58.2 billion to R70.1 billion.
HOW SHOULD WE UNDERSTAND THE SHORTFALL?
The current revenue shortfall is driven by the slump in corporate income tax (CIT), value-added tax (VAT), and mining royalties, which collectively account for 75% of the under-collection. CIT’s under-collection is driven by the poor performance of the mining sector in 2023. The weak performance of the mining sector has also had an effect on another source of revenue, mineral and petroleum royalties.
READ: Government is not cutting spending, it's happening by itself, says treasury
It is important to note, however, that the response from the National Treasury to anticipated and previous shortfalls has precipitated sharper revenue shortfalls. This was the case, in anticipation of shortfalls by the end of 2016/17, 2017/18 and 2018/19, where responses included reducing spending, reprioritisation of funds, and implementing austerity measures. This means that fiscal consolidation – through generalised economic contraction – has, in effect, contributed to revenue underperformance, and we should expect similar results should the policy continue.
THE SCALE OF THE EXPENDITURE OVERRUN
In addition to a revenue shortfall, we estimate an expenditure overrun of between R67.9 billion and R105.8 billion, if spending continues as planned for the rest of the year. Just as with revenue, this expenditure overrun is not an anomaly. In each of the past four fiscal years, 2019/20 to 2022/23, the government has seen expenditure overruns ranging from R27.2 billion to R60 billion.
HOW SHOULD WE UNDERSTANDTHE EXPENDITURE OVERRUN?
Large portions of the expenditure overrun were foreseeable and the National Treasury failed to budget for key line items, such as the public sector wage increase.
This is despite inflation being consistently above 5% since 2021 and almost reaching 8% by the beginning of 2023.
In addition, there have been a number of “unfunded budget submissions” on equally predictable items, for example, R17.4 billion from the healthcare and education provincial departments.
These unfunded budget submissions result when the Treasury deliberately does not allocate funding for key programmes that it is opposed to, such as the social relief of distress grant and the presidential employment stimulus. This is despite their demonstrated impact in alleviating poverty, improving livelihood strategies and restoring the dignity of the unemployed.
The commitment to austerity has therefore led to deliberate under-budgeting and cuts to key public services and programmes. In this case, it is not surprising that there is a budget overrun since it has been manufactured to pave the way for more spending cuts.
HOW DO WE RESOLVE THEBUDGET MISMATCHES?
Although our research shows that budget mismatches have been historically part of the budget, this year’s situation is worse than usual as the revenue shortfall and the expenditure overrun compound each other. This points to the failure of fiscal consolidation and is not sustainable.
The current challenges present an opportunity for the fundamental reform of South Africa’s fiscal framework. This reform needs to prioritise the role and potential of the budget in advancing developmental priorities and directly tackling unemployment, poverty and inequality. It is this type of fiscal framework that can drive economic expansion through a credible growth strategy.
Instead of resorting to budget cuts, the government should close revenue gaps and improve expenditure for key public services, employment creation, social protection and structural transformation.
Proposed alternatives
The proposed interventions can be sequenced into three pathways. That is, immediate, short-term (February 2024) and medium-term (February 2025).
IMMEDIATE RECOMMENDATIONS
Treasury can close revenue and expenditure gaps by drawing from the Gold and Foreign Exchange Contingency Reserve Account. This account is held by the SA Reserve Bank and it essentially tracks profits and/or losses made, based on movements in foreign exchange rates and gold prices. The account currently has R459 billion due to the South African government.
Another immediate measure that can be taken is to increase borrowing. While many arguments have been levelled against more borrowing, it is important to note that the quantum of debt required to address the budget mismatch would not substantially increase our debt-to-GDP ratio.
In fact, the debt-to-GDP ratio would still be 14.3 percentage points below 2021’s National Budget projection, and 3.5 percentage points below the medium-term budget policy statement projection. It is important, however, that such borrowing is also used to drive structural change and improve social and employment outcomes.
SHORT-TERM RECOMMENDATIONS
Remove tax breaks for selected high-income earners, corporates and restore the CIT rate to 28%. In 2023, R305 billion will be lost through these tax breaks, and we estimate that R12 billion has already been lost from decreasing the CIT rate. No evidence has been presented to show that the decrease in the CIT rate has increased investment or discouraged tax avoidance, as was intended.
A majority of these tax breaks for some high-income earners are from retirement fund benefits (R232 billion), medical aid rebates (R32 billion) and accrue to those earning R500 000 and more.
MEDIUM-TERM RECOMMENDATIONS
More should be done to tax wealth and trading of financial assets. Compared with peer countries in the Organisation for Economic Co-operation and Development and Latin America, South Africa massively under-taxes wealth and trading of financial assets. For instance, as a share of GDP, revenues from wealth have averaged 1% in Argentina since 1990, 1.98% in Colombia since 2002, 0.207% in Ecuador since 2009, and 3.5% in Uruguay since 1990.
In addition, the government must take advantage of windfalls by instituting a resource rent tax (RRT). In the past two years, South Africa has missed the opportunity to utilise the profits generated in the commodities sector to support revenue.
These alternative proposals, alternative to the indiscriminate budget cuts Treasury deems necessary, show that the current fiscal challenges South Africa faces are not insurmountable and can be addressed. They further provide a stepping stone towards structural transformation that does not compromise social and economic imperatives.
- Mncube is tax and budget policy researcher at the Institute for Economic Justice
