Tax, wage bill, debt, pandemic: Mboweni’s tightrope budget policy statement

As government debt rises, investors and the public will closely watch the Medium Term Budget Policy Statement (MTBPS) on Wednesday for details of the government’s commitments for fiscal consolidation. 

The MTBPS is also expected to provide details on how the fiscus will support President Cyril Ramaphosa’s economic reconstruction and recovery plan, which shows that the government is targeting 3% average annual economic growth over the next decade. 

But economists have warned that the country’s limping economy faces an uphill battle because Covid-19 lockdown has exacerbated the country’s fiscal and economic outlook

It is now up to Finance Minister Tito Mboweni to demonstrate how the treasury plans to pull the country out of the rising debt trap, which he has previously described as the “closing [of] the jaws of the hippopotamus”.

June’s supplementary budget showed that the country will face a sovereign debt crisis by 2024 if the government does not reverse the deficit, which is projected to increase by 15.7% of gross domestic product (GDP) this year.  The main factors include a sharp fall in tax revenue and the general economic fallout from the pandemic. 


Treasury’s scenario projections show that government debt should stabilise at  87.4% of GDP by 2023-2024.
This will require implementing policy reforms and expenditure cuts of R230-billion over the next two years. Jeffrey Schultz, the chief economist at BNP Paribas, says the MTBPS is likely to be based on austerity measures. 

Mboweni is expected to put more “meat on the bones” of the supplementary budget and where the cuts to expenditure will be made, including to state-owned enterprises and the public sector wage bill. 

The government is involved in a drawn-out court battle with public sector unions who are opposing the government’s plans to save R160-billion by cutting the wage bill. If the government does not cut the wage bill, the expenditure will cost 58% of revenue this year, Schultz says. 

Although the supplementary budget gave the public the lay of the land, Maarten Ackerman, the chief economist at Citadel, says the MTBPS will give a clearer picture of the country’s finances.  

He says the budget should focus on the execution of the government’s plans. If it does not materialise, it will jeopardise the envisioned “active scenario”, which will result in the government having to borrow money to repay its creditors. But, given the negative effect of the pandemic on the economy, Ackerman says the government’s plans for fiscal consolidation in the medium term are unlikely to be achieved. 

Over the medium term, Ackerman says the country is more likely to find itself in between the active and passive — debt continues to rise, and debt-service costs outstrip spending on social and economic priorities — scenarios, “which still puts us in a difficult situation”. 

The MTBPS is also expected to detail how the government plans to plug the hole left by the more than R300-billion tax shortfall.  

Bernard Sacks, the tax partner at Mazars, says that given the ban on the sale of alcohol and tobacco from April to August, the shortfall could come in higher than the June forecasts. 

“The excise duties and VAT charged on these products are significant sources of income for the government. I’m not a medical expert, so I can’t say whether it was the right thing to do from a medical perspective, but certainly, from a fiscal perspective, it was a disaster,” he said in a statement. 

Although the treasury does not announce new taxes during the MTBPS — that’s usually done during the February budget — Nazrien Kader, the head of group tax at Old Mutual, says Mboweni could announce new taxes such as a three-year temporary tax or “solidarity tax” on high net worth individuals, a wealth tax and a digital tax. 

Although the introduction of new taxes may “prop up” the country’s revenue in the medium term, Kader says “Minister Mboweni cannot just increase taxes [to put a dent in the budget deficit]. He has to make sure that we have a properly capacitated SA Revenue Service that can enforce tax collection.” 

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Thando Maeko
Thando Maeko is an Adamela Trust business reporter at the Mail & Guardian

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