Today, Malusi (trying-to-keep-my-job) Gigaba will deliver the 2018 budget. It will be painful for all of us, as government attempts to tackle the debt-monster, and bring soaring interest costs under control, through a combination of reducing expenditure and increasing revenue, writes MANZA MUSA.
Over the last 10 years, following the 2008 global financial crisis, South Africa accumulated a mountain of government debt. Government borrowed more and more to meet its socio-economic objectives and support the economy through a period of slow economic growth. Subsequently, government debt increased exponentially from 22% of GDP in 2008 (R55.6 billion) to 55% of GDP (R2.2 trillion in 2017). With higher debt came higher interest costs.
Last year, government spent R147.7 billion on interest, more than it spent on basic education, higher education, health, and water and sanitation combined. With already 11% of total budget dedicated to servicing government debt, increasing government debt further is simply unsustainable, and will reduce the budget available for other government priorities.
The high level of government debt, combined with slow economic growth and poor revenue collection, has also raised the alarm bells of governmentâ€
Slowing down the growth in government debt is now more of an imperative for government. To do this, the gap between expenditure and revenue needs to be reduced. Only when this gap is closed will government debt stop increasing and stabilise. At present, the gap between revenue and expenditure is around a staggering R200 billion a year. This means, if government intends to reduce this gap, it would need to find an additional R200 billion without borrowing, every year. It has to raise revenue or cut spending. Given the size of the gap, government would have to raise revenue and reduce expenditure to make a difference.
On the revenue side, government can increase tax rates for corporates (CIT), increase value-added tax (VAT) or personal income tax (PIT). It can increase levies on fuel, eliminate medical tax credits, and increase the rates on capital gains. All of these options have a cost to the economy and households. Increasing corporate tax rates may bring in more tax in the first year, but it may also affect the decision of investors to invest in South Africa in the future. This would limit growth and employment prospects for the country. Increasing VAT harms households, increases prices, and possibly reduces consumption and economic growth. Increasing VAT also harms poorer households more than wealthier households, given the share of income spent by poor households relative to rich households. Eliminating medical tax credits makes healthcare more expensive for the middle-class.
On the expenditure side, government faces a difficult job in determining which programmes to fund, which programmes to fund partially, and which programmes to eliminate. Naturally, programs directed towards poverty alleviation and social security have to be maintained. Health, education, social grants, policing etc. are presumably non-negotiable. Does that mean government programmes directed towards generating economic growth such as transport, communications, industrial development, and small business should see their budgets cut? If so, that would possibly reduce the growth potential of the economy, and thereby the ability of the country to raise revenue to meet further socio-economic objectives such as free-higher education and a national health insurance.
There are, unfortunately, no pain-free options at governmentâ€
Manza Musa is a rebel economist.
The views expressed in this article are the authorâ€