Finance Minister Malusi Gigaba. Picture: THE TIMES
Finance Minister Malusi Gigaba. Picture: THE TIMES

When Finance Minister Malusi Gigaba addressed economists at the Thomson Reuters economist of the year awards in mid-July, he noted that the economy had just entered recession.

"Lower-than-expected growth is likely this year, which will put strain on our fiscal framework. Going into the October medium-term budget policy statement, we will have some tough decisions to make," he said.

Just how tough is something the minister has been remarkably shy about discussing, even though he has had much to say about the need to transform the economy.

He has promised, repeatedly, that the government will continue on the path of fiscal consolidation. But, he has entirely failed to start managing expectations ahead of his October budget speech about just how tough that will be. Whether that is because he refuses to believe the numbers that are no doubt being crunched within the Treasury, or because he reckons he can somehow spin his way out of trouble, is not clear.

The fiscal squeeze is, in large part, because the economic outlook is worse now than it was in February, when the economy was already looking weak and then minister of finance Pravin Gordhan had already revised economic growth and revenue projections downwards.

At that stage, however, it was still feasible to pin the budget numbers on a forecast that the economy would grow 1.3% in 2017, rising to 2% in 2018 and 2.2% in 2019.

Now we can but dream of even those modest numbers. The Reserve Bank and ratings agency Moody’s have 2017’s growth at 0.5% and some economists expect closer to zero growth, especially if the economy doesn’t pick up meaningfully in the second quarter of 2017.

A much lower than expected growth rate directly affects revenue collection, which will inevitably fall short of the targets.

It is early days still, with the Treasury’s monthly revenue figures available only to end-June, but indications are that the shortfall could be as much as R45bn to R50bn for the 2017-18 fiscal year, which is not far short of the shock R60bn shortfall at the height of the global financial crisis.

An ailing economy and ailing household sector are big factors, but so too is the state of tax compliance and tax administration. The Treasury and the minister warned in February of concern about tax compliance, tax morality and tax administration. Taxpayers are under pressure economically and in a climate of state capture and corruption, where so much of the money they pay in taxes is effectively wasted, they are surely going to be increasingly reluctant to pay up.

And while the South African Revenue Service is given to denying it has any challenges or problems, there is no question that its capacity has been eroded along with its credibility in the wake of a series of scandals and that tax administration is not what it once was.

All of which presents Gigaba with the problem of what to do about his fiscal framework. It’s hard to boost taxes or cut spending in the months that remain of the current year, so chances are that the budget deficit could come in well above the 3.4% forecast in February and that revenue and deficit targets will have to be revised for the next two years as well.

Perhaps ratings agencies and investors could be persuaded, yet again, to forgive a one-year breach. But unless the government is willing to cut spending in absolute terms over the next two years, and do something about revenue collection, there’s very little chance of persuading them that SA’s fiscal management is still credible.

It would be tragic if SA were to lose its solid fiscal policy and even more tragic if it faced further ratings downgrades. The medium-term budget will be a watershed.

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