Postponed budget creates elevated level of policy uncertainty: economists

The unprecedented decision by the government of national unity (GNU) cabinet to postpone the budget until March 12 because of disagreement over tax increases, will inevitably have unintended consequences for the country’s political economy. 

This is according to NWU Business School economist Prof Raymond Parsons. 

Parsons said the sharp controversy about the tax burden could basically be seen as symptomatic of the fact that economic growth in South Africa had been too low for too long.

“The tax base as a whole has shrunk as a result, given persistently low growth, thus limiting financing options. The postponed budget will nonetheless create an elevated level of policy uncertainty for now, which has already been reflected in the rand.”

He said if the eventual budget in March turned out to be truly committed to growth and job creation — as outlined in the recent GNU medium term development plan — the delay would be worthwhile if the GNU agreed ‘trade-offs’ and better outcomes for the economy as a whole. 

“Markets will now be carefully monitoring the progress being made by the GNU from now on in finding sufficient consensus about the final budget.”

Parsons said between now and March 12 there should be an informed and reasonable debate about the fiscal options available to the country to strike the right balance between spending, borrowing and tax in ways that promote policy certainty and job-rich growth. 

Economists at law firm Nortons Inc, Avias Ngwenya and Marylla Govender, said in the context of the GNU, which represented a diversity of political views, it was clear it was difficult to achieve consensus on levying additional taxes as a means of generating more revenue for a cash-strapped fiscus.   

With a high and unprecedented debt to GDP ratio and little room to manoeuvre on the revenue side, this would always be a budget where finance minister Enoch Godongwana would have had to walk the proverbial “fiscal tightrope”, they said. 

“At both a corporate and individual level, it is apparent that the minister is mindful of the very real negative implications of raising either of these taxes. An increase in corporate tax would raise the cost of doing business and invariably lead to job losses, and potentially undermine future investment opportunities.   

“On the other hand, raising personal income taxes would have deleterious implications for already cash-strapped South Africans, who are already being taxed to the hilt,” Ngwenya and Govender said.

They also said it was apparent government was not in a position to raise any more debt without significant consequences.   

“With the sustained increases in debt levels over the last 10 years which has resulted in a debt to GDP ratio of 75%, this is no longer an avenue which government can turn to.”

Any additional increases in debt will result in higher interest payments and increase the risk of doing business in South Africa. This left a contentious decision to raise VAT by up to two percentage points.

“Given the limitations available to the government to raise funding, the increase in VAT appeared to be the only option as unpalatable as that may be. The proposed increase has clearly caused a stalemate within the GNU as views differ on the impact this will have for the majority of South Africans.”   

Ngwenya and Govender said the public sector wage bill was another significant source of pressure affecting the ability to balance the national fiscus.

“The new agreed wage agreement over the next three years will cost an additional R23.3bn.” They said this was money which government clearly does not have.

“These latest developments are a stark reminder that South Africa is living well beyond its means. Significant interventions are required at all levels of government, from local government all the way through to national government, to eliminate fruitless and wasteful expenditure.

“It is also clear that there is the need to implement much-needed structural reform, which is key if South Africa is to achieve the levels of economic growth required.”