Warning of ‘seismic’ tax hikes, spending cuts to close R50bn 2018 Budget hole

13th February 2018 By: Terence Creamer - Creamer Media Editor

Warning of ‘seismic’ tax hikes, spending cuts to close R50bn 2018 Budget hole

Standard Bank chief economist Goolam Ballim

Standard Bank chief economist Goolam Ballim is warning that the upcoming Budget will include “seismic” tax increases and spending cuts to address a menacing “fiscal cleavage” that, in nominal terms, is unprecedented in South Africa’s history.

The Budget is scheduled for release on February 21 and there has been no indication yet that it could be delayed as a result of ongoing uncertainty about the departure of President Jacob Zuma, who the African National Congress has recalled. It has been reported that Zuma has refused to resign.

The State of the Nation address, which was due to be delivered on February 8, has already been postponed and an opposition-led motion of no confidence in Zuma is currently set down for February 22.

In October, Finance Minister Malusi Gigaba announced that the consolidated Budget deficit would widen to 4.3% of gross domestic product (GDP) in 2017/18, against the 2017 Budget target of 3.1% of GDP. The deficit was expected to remain elevated, at 3.9% for 2018/19, even before the promise of free tertiary education made by Zuma in December.

Releasing the bank’s 2018 economic outlook on Tuesday, Ballim said that a R51-billion “fiscal correction” would be required to prevent further fiscal slippage, even before factoring in the promise of free tertiary education.

He indicated that, to deal with the current imbalance, a “blend” of spending cuts of about R25-billion, along with R30-billion of tax increases, would probably have to be implemented.

“You can’t deal with this only through R50-billion-worth of tax hikes and you probably can’t have R50-billion-worth of spending cuts, simply because of the service delivery compromise and the social unrest that would foster,” Ballim said when releasing the bank’s 2018 economic outlook on Tuesday.

“The crevice is just so big – unprecedented in nominal terms – that you’ve got to do both. Ultimately, the most significant question is: how do you do it in a manner that is least damaging to the recovery, that is least damaging to growth.”

This precarious fiscal position also meant that the Budget would erode many of the economic gains associated with the country’s more supportive political economy, as well as anticipated improvements in household incomes and balance sheets, which would be supportive of consumer spending.

“While we may open with consumer fundamentals, seen through the real income and credit channels, as being supportive, the additional tax burden is going to meaningfully erase especially high middle income and high income consumers’ capacity [to support growth],” Ballim said.

“Before the impending tax hikes, we would argue that high-income individuals could enjoy 2% real-income growth in 2018. However, after the potential for seismic increases in the tax burden, that would fall to a mere 0.5% of real-income growth, compromising the spending thrust that they could inject into the economy.”

The bank expects a range of tax hikes to be considered, possibly even including the lifting of the Value Added Tax zero rating on fuel, which could generate nearly R19-billion in revenues. However, Ballim felt there was a “very high” probability of boosting revenue through fiscal drag (R12.5-billion), the sugar tax (up to R1.5-billion), additional fuel levies ((R7-billion) and additional duties on alcohol and tobacco product (R2.5-billion).

The reforms likely to be associated with African National Congress president Cyril Ramaphosa’s ‘New Deal’ would also be supportive of a recovery in growth and investment. The recent political developments could also help stave off a further ratings downgrade by Moody’s.

“Broadly speaking, we think we are at the bottom of our various ratings cycles. But we may remain locked there for some time, because fiscal remediation does take time.”

However, much would depend on a revitalisation of the social compact with business, as private-sector investment would be required to close the gap left by a decline in investment by government and State-owned companies.

Nevertheless, the bank is forecasting that South Africa will growth by 1.5% in 2018, representing a recovery from an expansion of only 0.9% in 2017.

Ballim said South Africa required sustained GDP growth of above 2.5% from 2019 to stabilise its debt. The current growth trend rate was between 1.5% and 2%, when meant that investment was required to elevate growth levels.