When the Zondo commission of inquiry into state capture embarks on its public hearings, one person who is sure to be called to testify is Finance Minister Malusi Gigaba. That is just one of the reasons why Gigaba cannot be retained in this crucial post in the new administration of President Cyril Ramaphosa.
But whether Wednesday’s budget is presented by Gigaba or a brand-new minister, the important thing will be to look through the noise and the probably rather dire fiscal year to the three years of the medium-term framework.
Ramaphosa has undertaken to set up a judicial commission of inquiry into tax administration shortly, and that should provide the basis for a clean-up at the South African Revenue Service (SARS) that will improve its effectiveness in collecting taxes. We can assume too that SARS commissioner Tom Moyane will not last long in his post. And while revenue collection will not start to recover fully until the economy stages a more robust recovery, turnarounds in tax administration and tax morality would help to tackle customary steep revenue shortfalls.
Ramaphosa’s new broom holds out the promise, too, that economic growth rates will pick up. His initiatives should start to drive growth and job creation sustainably in the medium term. Improved growth and tax collection capacity could change the fiscal trajectory quite significantly in the next few years.
In crafting the budget numbers, the Treasury will have to be realistic and credible with its growth and revenue projections. Better to take the risk of underpromising and overdelivering than the reverse, especially given the close scrutiny the numbers will be under from market players and ratings agencies.
The Treasury will no doubt revise its growth forecasts slightly upwards, and that should help to improve the fiscal ratios over the medium term. But there is no getting away from the need for tough and urgent action, on the taxing and the spending sides of the budget, to get SA’s public finances back on track and arrest the continued ballooning of the public debt ratio and the ever-rising cost of servicing that debt. The government has already committed to R30bn in tax measures and at least R25bn in additional spending cuts for the 2018-19 fiscal year.
This time it has to be bold, finally, and raise the value added tax (VAT) rate. With revenue falling short and free higher education adding extra pressure, a one or even two percentage point raise in the VAT rate is the only real option. Imposing VAT on fuel has been suggested as an alternative but, though hidden, that would be even more damaging to poor people than a VAT hike because the cost of fuel heavily affects the price of bread and other staples that are exempt from VAT.
Nor are further hikes in personal income tax rates an option: consumers, especially high-income individuals, have borne the brunt of the tax hikes of the past three years and declines in revenue buoyancy and tax compliance indicate that it’s impossible to squeeze more out of that personal income tax pot. It does make sense to lift wealth-type taxes such as estate duty to make a VAT hike more palatable. But if the government wants to raise the extra revenue it needs while minimising the damage to growth and maximising the message of fiscal consolidation to ratings agencies and investors, VAT is the best way to do it.
Equally, it will be crucial that the government takes the scalpel to wasteful and unnecessary expenditure and bloated departments, ideally in ways that don’t affect growth or service delivery too much. The government’s largest spending problem is the public-sector wage bill and it surely is high time that the government and the public-sector unions agree to curb the endless, budget-busting growth in the wage bill.
As important as Wednesday’s ratios is how much resolve the government has to get its fiscal house in order. Without that, any growth rate lift will continue to be built on fragile foundations.