/ 25 October 2009

Tax shortfall looms over mid-term budget

Finance Minister Pravin Gordhan faces a massive shortfall in tax revenues as he presents the mid-term budget on Tuesday, likely to double the estimated fiscal deficit.

It will be Gordhan’s first budget since he took over from the popular and charismatic Trevor Manuel, who held the post for 13 years, but the mid-term version of the annual budget is not the place for policy changes.

“The big issue, of course, will be on the revenue side,” said economist Dawie Roodt of the Efficient Group.

“Revenues are currently under severe pressure because of the economic slowdown and I won’t be surprised if we see about R70-billion, maybe R80-billion or R90-billion under budgeted estimates.”

South Africa’s economic outlook has worsened considerably since the February budget when growth for the year was expected to be 1,2%.

“The biggest challenge is the fact that the economy is not growing fast enough for government to generate the tax revenues to finance development,” said Tony Twine, an economist with Econometrix.

Ahead of South Africa’s elections in April, which returned the ruling party to government, Manuel poured billions into public infrastructure investment and social spending to boost long-term growth.

But, eight months later, the recession has been worse than imagined, with the economy estimated to contract at 2% in 2009, and a budget deficit pinned at 3,9% likely to balloon nearer to 7%.

Jac Laubscher, Sanlam group economist, says this is probably the most important mid-term budget to date, as it questions the sustainability of South Africa’s prudent fiscal policy for the first time.

“… The challenge over the next few years will be quite different, namely to curb spending until the economy, and therefore tax collection, has recovered sufficiently.”

The International Monetary Fund forecasts growth of 3,3% over the next three years.

Roodt said low state debt in recent years meant “we can afford to run quite a large fiscal deficit for quite some time”, but there won’t always be room to do this.

The billions of rands in tax relief for individuals that Manuel has given over the years is likely to grind to a halt in the next few years and possibly reverse as the economy recovers.

The mid-term budget comes amid mounting pressure on the new government, with violent service-delivery protests on the rise, a widening poverty gap and 724 000 jobs lost since last year.

Beleaguered power giant Eskom is angling for a 45% annual tariff increase, after two increases totalling 59% since last year, as it struggles to finance two new power stations to meet increasing energy demands.

While the powerful left pushes for a greater role for the state in the economy, Laubscher warns they will have to think again.

“In fact, the squeeze in which the government finances is going to find itself necessitates a greater role for the private sector, inter alia in the development of infrastructure through public-private partnerships.”

He says new initiatives such as a contentious proposed national health service and national social security system are risky in the current vulnerable economy.

“Caution will have to be the operative word and risky initiatives, the outcome of which cannot be predicted with reasonable certainty, should be avoided.” — AFP