Budget 2017: How to deal with lots of promises, little effective implementation

Cape Town - Ahead of Budget 2017 one can say there have been lots of promises, but little by way of effective implementation, Ernie Lai King, head of the Johannesburg tax department and the African-Asia Practice of Hogan Lovells (South Africa), told Fin24 on Tuesday.  

"We appear to just roll out the same old, same old platitudes regarding the need to grow the economy, address poverty, transformation and more, but we lack the very basics, namely good governance, good skills and good infrastructure in order to make progress," said King.

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"It's all about the economy and how we can implement a practical, sustainable growth plan in an environment of declining tax revenues, increasing social spend – for instance "Fees must fall" and corruption – all in the face of increasing national debt."

King pointed out that in the Mini Budget of October last year Finance Minister Pravin Gordhan indicated that much of the increase in public debt stemmed from the following:

- An unwillingness or inability by national governments to control expenditure;

- Hidden deficits and uncontrolled borrowing in the lower tiers of government;

- Choices by public agencies and state-owned companies that committed national budgets to implicit guarantees, without following normal budget processes - such as the pursuit of loss-making mandates;

- Unanticipated bailouts of private-sector financial institutions;

- Large issuances of foreign-denominated debt that grew rapidly as local currencies depreciated;

- Underfunded social security systems.

Falling short

Gross tax revenue is projected to fall short of Budget 2016 projections by R23bn in the current year, R36bn in 2017/18, and R52bn in 2018/19, according to King. Furthermore, several state-owned companies could pose risks to the public finances. In particular, government is closely monitoring South African Airways (SAA), the SA Post Office (SAPO), the SA National Roads Agency (Sanral) and Eskom.

"To increase output, the economy requires investment in other productive assets. Spending on machinery and equipment has declined sharply. If investment is insufficient to replace worn assets, the resulting capital erosion can weaken the economy’s growth potential, with negative consequences for job creation," said King.

"There has been a consistent decline in manufacturing fixed-capital stock, which fell by 11.3% between 2008 and 2015, signalling an erosion of the manufacturing asset base," said King.

"As a nation we are at a crossroad, politically and economically. The problems are deep rooted and lie with the public sector."

Gordhan has in the past pointed out that policy statements are sometimes unclear or conflict; commitments are made without clear resource plans; implementation is derailed by institutional instability; investment is held back by uncertainties and erosion of trust and vested interests and political contestation interfere with decision-making.
 
"So, we can fiddle around with fiscal drag, increase maximum marginal tax rates for 'high-wealth' individuals, increase capital gains tax (CGT) rates, increase estate duties, talk tough about anti-avoidance, increase the 'invisible taxes', but the core issue is how to kick-start the economy and redress the blockages mentioned above," emphasised King.
 
"If we can address the blockages and free business to do business and increase confidence, then the private sector and foreign investors are waiting to get on with unlocking our economic potential. We still have a strong economic base, but every year it erodes just a little bit more and investors move on to less risky developing countries like South East Asia."
 
King emphasised that no-one is waiting for SA to show the "open for business" sign. In his view a good start would be the privatisation or semi-privatisation of non-performing, loss making state enterprises.

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