/ 27 October 2014

Medium-term budget could herald dawn of austerity

There are fears that last week's medium-term budget by Finance Minister Nhlanhla Nene could be the start of austerity for South Africa.
There are fears that last week's medium-term budget by Finance Minister Nhlanhla Nene could be the start of austerity for South Africa.

Although largely praised by the market, Finance Minister Nhlanhla Nene’s medium-term budget delivered last week has been criticised by civil society and trade unions who fear spending cuts could slow the economy.

The medium-term budget policy statement (MTBPS), was marked by government spending cuts, through a further lowering of its existing expenditure ceiling by R25-billion. There has also been a tightening on government’s wage bill, notably through a freeze in personnel headcount. 

These are in addition to indications of tax increases, due to be announced in February, through which Treasury aims to raise R44-billion over the coming three years. 

The proposals seek to stabilise South Africa’s rising government debt and reduce the budget deficit, currently estimated at 4.1% of the gross domestic product (GDP). Nene also stressed that further funding for state owned enterprises (SOEs), would only be granted if it did not adversely affect the overall government’s financial position by worsening the deficit. 

‘This is how it starts’
It was becoming clear that this was the beginning of austerity, Dick Forslund, economist at the Alternative Information and Development Centre, told the Mail & Guardian

Despite Treasury’s assurances that the budget proposals were not comparable to the austerity measures taken by European countries in recent years, “this is how it starts”, said Forslund. “If you reduce state spending in the economy, you contribute to a slow down in the economy,” he said. 

There was no indication that an upswing in the global economic environment, which could trigger improvements in local growth, was assured, said Forslund. The MTBPS was only aimed at addressing the current deficit and appeasing ratings agencies, and would not be sufficient to support social spending notably on programmes such as national health insurance, he argued.

Trade union federation Cosatu also criticised the MTBPS, saying that Nene had delivered a “full-on austerity three-year budget framework, at a time when we desperately need economic growth, productive investment and employment creation”.

Cosatu pointed out that declines in real non-interest spending were far more drastic than those forecast in the 2013 MTBPS. Real non-interest expenditure – which takes into account the affects of inflation and excludes interest paid on debt – is set to grow by 1.3% versus the 2.1% that was forecast a year ago. 

The decline in expenditure was “lower than the level of population growth, and therefore a real cut in spending, at a time when we have a desperate need to stimulate our economy, deliver services in underserviced areas, and invest in employment creation”, Cosatu said. 

Nene, however, was adamant that interpretations of government’s fiscal consolidation efforts as austerity was “an exaggeration”. Ahead of delivering his budget, he told journalists that in most cases spending had been frozen at levels for the 2014-2015 financial year. This was designed to reduce the rate at which spending was growing, not enact real spending cuts, he noted. 

Forslund did, however, welcome Treasury’s plans to implement tax increases. But he argued they needed to be far more extensive to fund programmes like the NHI, which alone needs an estimated R120-billion.

Higher taxes for the rich, through increasing the marginal tax rate on the country’s top earners from 40% to 45%, has been proposed as a way of increasing state revenue. 

Judge Dennis Davis, head of the Davis Tax Committee, which government set up last year in order to review the country’s tax policies, has pointed out that this measure is only likely to raise around R4-billion extra for state coffers.

Forslund argued however that increasing tax compliance, notably by South Africa’s high net worth individuals, would drastically improve revenues. 

The most recent Credit Suisse Global Wealth Report revealed that some 47 000 South Africans were dollar millionaires. This number far exceeds the roughly 2 300 people the South African Revenue Service has identified as high net worth individuals – defined as people with an annual income of over R7-million, or assets worth R70-million. 

Illicit outflows
According to Forslund, if only 10 000 high net worth individuals were brought into the system during the coming period, tax revenue would increase by more than R35-billion per year. 

Similarly, the state had to halt illicit capital outflows, said Forslund, as well as address the problems created by tax planning mechanisms such as transfer pricing. One report by advocacy group Global Financial Integrity estimates that South Africa has lost $100.7-billion through illicit outflows between 2002 and 2011. 

Transfer pricing, which allows companies within a multi-national corporation to set costs for trading with one another, has been criticised as a way for large conglomerates to shift profits to low tax havens. Many countries have been confronted with the impacts of these practices – known as base erosion and profiting shifting – as state tax revenues have plunged in the wake of the global financial crisis. 

The matter is one that the Davis Tax Committee is examining, but it is only expected to deliver its recommendations to the government ahead of February’s main budget next year. 

Meanwhile, Cosatu said the government was not doing enough to stop wasteful expenditure. Legitimate savings through eliminating wasteful expenditure had to be distinguished from “austerity cutbacks”, the federation said. 

It pointed to the millions spent on events such as the president’s State of the Nation Address, among others. It also listed other “glaring examples” such at the R35-billion misspent by the department of public works over the past five years. 

Bureaucratic process
Cosatu said it was also strongly opposed to freezing funded vacancies, and efforts to cut back the public sector wage bill, as this would compromise service delivery. “Government must indicate how many doctors, nurses, police, teachers and other posts it wants to cut, and motivate on what basis this needs to be done,” it said.

“This is a process that has to be engaged with through the bargaining councils and with unions and not simply left to a Treasury-driven internal bureaucratic process.” 

Public servants such as teachers, doctors and police, provided critical services and there were glaring pay discrepancies between high level officials and politicians and those providing frontline services, according to the federation. 

The statement does not bode well for Nene, which faces public sector wage negotiations early next year. Unions have expressed their intention to seek a 15% pay increase, while Nene has said the state can only afford a 6.6% increase.