New policies and programmes? Then match it with tax hikes

2017-10-25 14:21 - Liesl Peyper

Cape Town - The message in Wednesday’s mini budget is clear: if government wants to introduce any new programmes and policies, they will have to be matched with parallel tax increases.

In his maiden mini budget speech on Wednesday, Finance Minister Malusi Gigaba acknowledged that the period ahead is not going to be an easy one for the country.

“Our resolve is to remain on course and not to deviate irretrievably from the fiscal consolidation agenda. We will continue to optimise, squeeze and innovate to improve the quality and efficiency of our spending.”

Breaching the expenditure ceiling

Gigaba also warned that South Africa’s carefully constructed expenditure ceiling, introduced by his predecessor Pravin Gordhan, is in danger of being breached in the 2016/17 financial year by as much as R3.9bn.

In 2012, expenditure ceilings were introduced to enable government to manage spending levels in the context of a constrained fiscal framework.

The expenditure ceiling was lowered by R7bn in 2018/19 and R15bn in 2019/20 as a result of reductions to the contingency reserve.

The feared breach of this ceiling, Gigaba said, will be mainly as a result of bailouts to South African Airways and the South African Post Office to the amount of R13.7bn.

“We aim to avoid this breach of the expenditure ceiling through the disposal of assets,” Gigaba said, without giving more detail.

Servicing debt

South Africa’s debt service costs are currently the fastest-growing expenditure item in the budget, crowding out social and economic spending. By 2020/21 nearly 15% of the main budget revenue will be spent on servicing debt.

National Treasury foresees that gross debt will stabilise below 60% of the gross domestic product (GDP) over the coming decade. But this will require spending cuts or tax hikes amounting to 0.8% of GDP over the next ten years, translating into R40bn.

However, in his speech Gigaba admitted that the economic impact of further expenditure cuts or tax hikes could be counter-productive.

“Following several years of expenditure restraint, further budget cuts will involve hard choices and difficult compromises,” he said.

“Sudden or deep additional cuts that are not well targeted could put severe pressure on already stressed government departments.” 

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