Economists suggest areas to cut ahead of budget

Absent effective utilisation of existing government expenditure, reduction in state-owned entities' liabilities and fruitless and wasteful expenditure, the economy will not realise the much-needed economic growth required to drive job creation.

This is the view of Marylla Govender and Avias Ngwenya, economists at law firm Nortons Inc, ahead of the tabling of the national budget this week.

They said the budget takes place within the context of recently released GDP growth figures, which indicated a muted annual growth rate of 0.6% in 2024.

The figures revealed the key economic driving sectors such as agriculture, manufacturing, mining and construction declined significantly in 2024. These sectors are pivotal from a job creation perspective in South Africa, where the labour force is heavily skewed towards unskilled workers.

Govender and Ngwenya said this GDP growth of 0.6% was the slowest since 2020 when, like the rest of the world, the Covid-19 pandemic affected South Africa’s economic growth prospects.

In the medium-term budget policy statement in October last year, the National Treasury projected an economic growth rate of 1.7% in 2025, increasing to 1.9% by 2027. It said the national budget had a pivotal role in supporting these economic growth projections.

Govender and Ngwenya said VAT, personal income tax and company tax comprised about 80% of tax revenue.

“Though personal income tax comprises the largest portion of tax revenue (followed by VAT), South Africa’s personal income tax base has been shrinking.

“Now, it is estimated that 5% of taxpayers contribute about 80% of tax revenue collected. The weak economy, high unemployment and the continued emigration of skilled South Africans abroad have meant that an increasingly smaller portion of individuals are relied upon to contribute to this tax base.”

This was not a sustainable situation, they said.

“Raising personal income taxes on an already overtaxed population could serve as a disincentive to individuals, with a knock-on effect on consumption and economic growth.”

They said company income tax, the third largest source of tax revenue, was reduced in 2023 and now stood at 27%.

“This reduction in company tax sends an important signal to local and foreign firms to draw much-needed investment into the local economy. Continuing to increase taxes will bring about the 'Laffer curve' effect, a theoretical relationship identified by economists that recognises that when taxes are too high, individuals and businesses will be disincentivised to pay taxes and will look for ways to avoid taxes.”

As a result, higher taxes would result in lower overall tax collection.

“South Africa already has one of the highest levels of personal income tax globally.”

They said research by the Treasury, which considered an increase in the personal income tax rate in 2017 from 41% to 44%, had revealed that South Africa was at the peak of the Laffer curve and that there was a significant risk that any additional tax increases would lead to lower overall tax collections in South Africa.

The proposed two percentage points increase in VAT sparked much debate and resulted in a stalemate within the government of national unity.

“Nevertheless, it may be time to consider whether a differentiated VAT structure, whereby different VAT rates apply to different types of goods and services, could be a workable option (that is rather than applying an across-the-board increase to goods and services (with some zero rating), certain categories of goods would qualify for higher rates than others). This may allow basic goods and services purchased by the poor to be shielded from significant increases while applying higher VAT rates on luxury items.”

Govender and Ngwenya said notwithstanding the revenue-raising conundrum, much could be done to improve government spending efficiency while supporting much-needed economic growth in the medium term.

“South Africa’s public finances have been deteriorating for more than a decade. There is an inordinate amount of fiscal leakage, which, through increased accountability and proper management of SOEs, as well as national and local government expenditure, can significantly ease the financial pressure on South African taxpayers.”

The worsening financial performance of SOEs, will continue to strain the fiscus to unsustainable levels.

The postponed budget made it clear that additional funding would be allocated for Transnet in particular.

With SOE liabilities sitting at about R850bn, urgent interventions were required, the economists said.

“Unless there is urgent action to restore these entities to efficiency and more optimal financial management, SOEs will continue to pose one of the most significant risks to South Africa’s future growth prospects.”

The turnaround in the country’s electricity generation fortunes continued to hang in the balance, as evidenced by the recent unexpected bout of load-shedding, and the lack of investment in ageing public infrastructure had become self-evident daily.

“Increasing challenges due to deteriorating water infrastructure also weigh on the ability to grow the economy.

“Efficient and effective government investment in public infrastructure can have a significant 'multiplier' effect and set the foundation by creating an environment for economic growth, provided it is properly allocated and delivery is managed.”

They said local government continued to lose billions of rand each year.

According to the 2023/24 auditor-general report these losses were a result of “poor decisions, neglect and inefficiencies”. Between 2021/22 and 2022/23 fruitless and wasteful expenditure increased from R4.89bn to R7.41bn. Irregular expenditure remained high at R12.17bn in 2022/23. At the end of 2022/23 the accumulated balance of irregular expenditure was R136.98bn, accumulated unauthorised expenditure was R104.68bn and fruitless and wasteful expenditure R19.74bn.

“From a social security perspective, it appears that the government is persisting with the need to provide above-inflation increases to social grant recipients while also indirectly confirming that the Covid-19 SRD grant will continue under a different guise as “income support for unemployed people”.

“While this has helped mitigate the effects of Covid-19 and inflation, with one of the highest unemployment rates in the world, it is not entirely clear how this will be sustained.”

They said the public sector wage bill was another significant source of pressure which was affecting the ability to balance the national fiscus.

“With the third-largest public sector wage bill in the world as a proportion of GDP (ahead of several first-world countries such as the US and the UK), the new agreed wage agreement over the next three years will cost an additional R23.3bn, money which government does not have.

“This is yet another stark reminder that the public sector is extremely bloated.”

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