Advisory body FFC urges government to take bold action to boost economy

The Financial and Fiscal Commission (FFC) has urged the government to restore fiscal credibility and boost confidence in the economy.

Reacting to the medium-term budget policy statement (MTBPS) tabled by finance minister Tito Mboweni in parliament last week, the FFC, which was established under the constitution to advise government on fiscal policy, noted that the economy is trapped in a precarious growth trajectory and that the fiscal indicators are spiraling out of control. 

The National Treasury has forecast growth of 0.5% for 2019 and projects gross loan debt to GDP to reach 71.3% by 2022/2023.

“Policy and implementation certainty are the cornerstones of restoring confidence and fiscal credibility. The challenges require bold interventions, particularly regarding state-owned entities (SOEs),” FFC chair prof Daniel Plaatjies said in a presentation to four of parliament’s finance and appropriation committees on Tuesday.

Plaatjies emphasised the need to protect social expenditure on health, welfare and education, and to achieve greater efficiencies in spending. He called for caution about the public-sector wage bill saying that action in this regard should be based on a full understanding of what the public sector should look like, as well as its structure.

The FFC also recommended the adoption of a fiscal rule by the government for borrowing in terms of the amount, the composition and the usage of debt. The expenditure ceiling would be set by this fiscal borrowing rule, which would ensure that debt is only used for investing in productive growth activities that provide returns higher than debt-service costs.

“In most democracies you will find there are constitutional limitations to borrowings [and] to government guarantees issued,” Plaatjies said. “What we are saying is that there needs to be a standard of measure that is public.”

The FFC noted that, year after year, actual rates of economic growth and revenue collection consistently fail to reach targets projected by the Treasury. This adds to fiscal deficits as tax revenue was over-estimated. The commission is concerned that this damages fiscal credibility.

The FFC said it believes the scope for increasing government revenue by raising taxes is shrinking because “more tax hikes are most likely to negatively affect the economy’s performance and, hence, revenue collection as consumers are forced to economise on their purchases”.

Parliamentary budget office

The parliamentary budget office (PBO) also made presentations to parliament saying that the medium-term budget offered little in terms of macro-economic analysis and solutions for the current downturn. They also noted that some policy proposals in the medium-term budget, such as the reduction of the public-sector wage bill, could worsen tax revenue collection, in particular personal income tax and VAT. It could also have an effect on service delivery.

“Public-sector workers account for a relatively larger segment of the income tax base in SA both because they comprise a larger share of the workforce and because their earnings tend to be higher than their counterparts in the private sector. Consequently, the tax base is potentially more sensitive to public-sector pay policy decisions.”

The PBO suggested as possible sources of additional revenue the taxation of e-cigarettes and tobacco-heating products; re-assessment of the zero-rated basket of VAT; expanding the scope of the fuel levy; expanding the wealth tax; and the improved design and scope of tax incentives.

ensorl@businesslive.co.za