The treasury needs to focus on strengthening revenue collection, efficient allocation and optimisation
The cabinet has reportedly reached consensus on the budget proposal slated for presentation on 12 March, marking a milestone in the fiscal planning process. According to recent news reports, the minister is poised to consider several proposals, with the question of funding the anticipated R60 billion shortfall taking centre stage.
The ill-fated 2% VAT increase, which faced intense opposition and ultimately led to budget crumble, was a stark indicator of a fiscal crisis marked by the government’s struggle to balance the books. Moreover, the budget saga also laid bare the treasury’s inherent bias towards tax-based revenue generation.
While this is a ubiquitous mode of fiscal logic in many developed and emerging markets, South Africa’s complex landscape of intertwined economic, financial, business and social problems — characterised by sluggish growth, stagnant productivity, high debt, currency volatility, low business confidence, poor ease of doing business and pervasive unemployment — constrains the scope for additional tax-based revenue generative measures. In such dire economic times, increasing tax rates can lead to decreased revenue, as higher rates discourage economic activity, leading to reduced tax bases — the Laffer Curve.
Furthermore, alternative revenue-generating mechanisms, such as issuing government bonds, are also ill-suited to the country’s current circumstances. The prevailing high debt-to-GDP ratio, liquidity constraints, poor credit rating and currency volatility collectively render bond issuance an ineffective solution.
On the other hand, the notion of printing more money is untenable. With the M3 money supply — a measure of money supply that is released by the South African Reserve Bank — already at historical highs and low interest rates poised to fuel expansion, inflation is likely to escalate, complicating the bank’s efforts to maintain its 3% to 6% inflation target. Economic history unequivocally cautions against pursuing such a risky course of action.
The treasury can only seriously consider revenue collection, allocation and optimisation as an economically and socially viable solution to bridging the shortfall.
In the realm of revenue collection, the 2024 edition of Tax Statistics, jointly published by the treasury and the South African Revenue Service (Sars), presented a compelling narrative. The 2023-24 fiscal year saw Sars collect a substantial R2.2 trillion in gross tax revenue, marking a 4.2% increase from the previous year.
This upward trajectory is further underscored by the R413.9 billion in taxes refunded and a net tax revenue of R1.7 trillion (R54.2 billion more), representing a 3.2% growth. While the effect of these efforts might not be immediately apparent, owing to the timelines associated with tax returns, it is imperative that the budget prioritises the enhancement of these initiatives.
In addition, it is essential to think critically about revenue allocation and optimisation mechanisms. While reducing the size of the government and cutting salaries have been touted, such measures ought not to be viewed as a panacea. A 2017 World Bank study on Brazil, for example, revealed that reducing the wage premium of civil servants would only lead to a 0.9% GDP saving by 2026.
In contrast, the study found that enhancing the functionality of government departments and municipalities in procurement, labour and education could result in a significantly higher 2.7% GDP saving. This suggests that optimising revenue allocation and improving government efficiency, inclusive of cutting wasteful expenditure and addressing corruption, plays a critical role in the cost-saving calculus.
Pursuing such an approach not only necessitates institutional and systems-based re-evaluation but also warrants sustained political will. The treasury will have to decide whether its budget will be self-serving or postulated in the interests of South Africans. If it adopts a prudent approach, prioritising enhanced revenue collection, efficient allocation, and optimisation over a reliance on tax-based revenue generation, a window of opportunity to reverse South Africa’s economic fortunes might emerge.
Siseko Maposa is a director of Surgetower Associates, a management consultancy. He is a regular commentator on the South African political economy.