IEJ economists warn against ‘chaotic budget cuts’

The Institute for Economic Justice has warned that “chaotic budget cuts” are not the answer to the shortfall between tax collections and government spending.

In guidelines issued to national and provincial departments on 31 August, the National Treasury pointed to an “exceptionally large” drop in tax revenue of R22-billion for the first five months of the year, adding that borrowing conditions for the government were tough, and the public sector wage increase hadn’t been fully budgeted for.

As a result, the National Treasury instructed government departments to make some cost cuts for the rest of the year.

Read: SA treasury looks to rein in spending to avert budget blowout

But in a report issued ahead of Finance Minister Enoch Godongwana’s mid-term budget policy statement on 1 November, the IEJ says the shortfall isn’t extraordinarily large and there are ways to fix it without “chaotic budget cuts” which will hit the economy hard.

The fiscal crisis “is being exaggerated for political purposes”, say authors Gilad Isaacs, Zimbali Mncube, Liso Mdutyasna and Kamal Rambuth.

They estimate the revenue shortfall for the financial year at about R67 billion, in line with the Treasury’s figures.

Slump in mining taxes

Mostly, the slower tax collections are the result of a slump in mining, which had contributed a bigger and bigger chunk of corporate taxes in the last few years.

Taxes paid by firms in other sectors, and income tax paid by individuals, have been in line with expectations. And the revenue shortfall is not abnormally high, they say, pointing out that shortfalls of R61 billion, R58 billion, and R70 billion were recorded in 2017, 2018, and 2019.

On the spending side, much of the overspend is the result of the R37.5 billion public sector wage bill hike for which the Treasury should have budgeted, they say: “if this overspend is a ‘crisis’ then it is one entirely of National Treasury’s own making”.

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The current budget mismatch “can be solved relatively easily,” they say, proposing a series of options to raise revenue:

To fix the immediate shortfall they propose that the government:

• Move money from the Gold and Foreign Exchange Contingency Reserve Account, which is the account in which the Reserve Bank records profits and losses from foreign exchange transactions by the government – R459 billion in this fund is owed to the government, the economists say; and
• Borrow more. In 2022-23 South Africa’s debt was at 71% of gross domestic product, which is in line with the average of 69% for comparable economies. And even if the whole budget mismatch was covered by borrowing, the debt to GDP ratio would barely change, they say. Though in the long-term South Africa’s debt trajectory is a concern, current levels is not at “crisis” levels.

To raise additional revenue next year, they propose that the government:

• Raise taxes (but not VAT, which has a disproportionate effect on poorer people)
• Drop some tax breaks to high earners, especially for private pensions and medical aid (individual tax breaks amount to R305 billion and cutting some of these could raise upwards of R50 billion, they say
• Re-evaluate corporate tax subsidies
• Raise company tax back to earlier levels (it was cut from 28% to 27% in 2022). This is unlikely to discourage investment, they say, because investors are more interested in reliable electricity, good port and rail services, a safe environment, a skilled work force than in a slightly higher tax rate; and
• Reduce the cost of borrowing by moving to shorter term loans which are cheaper, and renegotiating the terms of loans.

In the medium term they say the government should:

• Consider a wealth tax – such taxes have been used in other countries in times of economic crisis and if the Treasury really believes this is a crisis, it would be a good time to introduce a wealth tax, they say; and,

• Reintroduce some form of the old “prescribed asset” policy in which retirement funds had to invest a proportion of their assets in government bonds (effectively lending to government). This would mean safe, guaranteed, returns for the investors and cheaper borrowing for the state.

© 2023 GroundUp. This article was first published here.