Far from being an indication of good health, the budget deficit is now the most glaring indicator of South Africa’s skills shortage and lack of capacity. This week, at the presentation of the Medium Term Budget Policy Statement, Minister of Finance Trevor Manuel will also have been reminded that he can never please everyone. In the statement, the most divisive issue was whether corporate taxes should be cut.
In this week’s mini-budget, the deficit was adjusted from 3,1% of gross domestic product (GDP) to 1% of GDP. For projected GDP of R1,5-trillion, this represents a potential additional spending of R30–billion.
Iraj Abeidan, CEO of Pan African Advisory Services, notes that the irony about the budget deficit is that the more the government tries to push the deficit towards 3%, the more it bounces closer towards 1%. Abedian describes the deficit as a “sign of a state machinery that cannot absorb capital expenditure”. This is juxtaposed against hospitals that do not function; dilapidated schools; big cities, never mind poor municipalities that cannot attend to basic infrastructure needs; and children who still study under trees. The capacity to spend additional money is the heart of the problem.
Manuel’s attempt to counter this deficit has been through an aggressive increase in spending. Next year, government spending will increase by 14%. If one excludes interest spending, the increase is more pronounced.
“They did not envisage this,” Dennis Dykes, chief economist at Nedbank, says about the R30-billion revenue overrun. He notes that, while the government keeps up pressure on spending, the capacity to spend is lamentable.
This week, Manuel disclosed additional R78-billion in spending over the next three years.
The bulk of this, R31-billion, will go to infrastructure, representing the government’s boldest signal of intent to push growth beyond 6%. Housing and municipal infrastructure receive an additional R20-billion, while hospital revitalisation and education get R12-billion.
The revenue overrun also raised questions about whether the case for corporate tax cuts is now, more than ever, compelling. Commentators are divided on the matter.
“Absolutely,” says Dykes when asked if this was a chance to give companies a breather. Dykes notes that company taxes of a 29% primary rate and secondary tax (STC) of 14,5% netted R100-billion. Abolishing the STC would shave R13-billion off the R30-billion additional revenue, hardly a figure that would make the Treasury agonise.
Dykes calls for an across-the-board tax cut rather than picking sectors that should enjoy tax savings. He notes that the services sector is an example of a job-creating sector that would benefit from additional investments. “Whenever you have tax cuts, you have economic growth,” he says, adding that you get “surprising investments in surprising sectors” driven by higher post-tax returns. Dykes argues that corporate tax cuts would send the strongest signal yet to foreign investors about the government’s desire to drive private sector growth.
Abedian contends that a tax cut for the corporate sector would simply “widen the gap between the haves and the have-nots”. He notes that the tax savings would simply find their way to shareholders, largely institutions and rich individuals. They will also translate into higher salaries and bigger bonuses for executives “who are already highly paid”. Abedian notes that post-tax returns are currently globally competitive, thus cutting corporate taxes will not lead to the revival of shelved projects. The case for a corporate tax cut becomes tricky when one considers that profits of listed companies were up 40% in the first five months of the year. This translated into corporate tax receipts rising 29% over the same period.
Abedian’s new battle cry is to “send ministers on roadshows” to recruit mathematics teachers from Ghana to India and wherever they may be, in the same way Ireland and Canada have done over the past decade.
This kind of marketing is more intense and personal than the type done by the International Marketing Council, which tells prospective visitors about sunny weather and beloved retired statesmen. So skills are what stand between the country and 6% growth. Well, that and more money to public sector. Dykes says between now and February, when the Budget is presented, the government must think hard about how best to encourage private sector growth.