'No, Minister Mboweni, this is not enough!' Economists and tax experts slate mid-term budget

2019-10-30 17:55 - Sibongile Khumalo
 (Jeffrey Abrahams. Gallo)
Mboweni presents medium-term budget in Parliament. (Jeffrey Abrahams. Gallo) ~ Gallo Images

Finance Minister Tito Mboweni's Medium-Term Budget Policy Statement was roundly condemned by economists and tax experts on Wednesday.

While there was some faint praise for its realism - Mboweni didn't pull any punches when painting an alarmingly stark picture of SA's economic and budget deficit outlook - the lack of government initiatives to deal with these challenges came under fire.

For all the news on Wednesday's announcements, visit Fin24's mid-term budget website

Here are some of the private sector views on the mid-term budget:

Bowmans: 'No, Minister Mboweni, this is not enough!'

“Rather than giving taxpayers the comfort that was sought, there is widespread frustration and indignation following (Mboweni's) presentation,” says Patricia Williams, tax partner at law firm Bowmans.

“Minister Mboweni highlighted that, after adjusting for inflation, the average government wage has risen by 66% in the last ten years. At the same time, taxpayers are informed that the expected savings from compensation and other measures announced in the 2019 Budget, amounting to R12bn annually over the next two years, have been reversed. For taxpayers, this creates the impression of overpaid government workers, with no real progress made on the promises to reduce the ballooning wage bill,” says Williams. 

“Promises of a salary freeze for certain senior staff, and that the cost of official cars will be capped at R800 000, feel like a slap in the face for ordinary citizens who are feeling the pain of the struggling economy.” 

One of the ways announced to reduce "wasteful" expenditure is by means of limiting claims against the state. These claims include medico-legal claims, where the state’s negligence or gross negligence has resulted in death or injury to ordinary citizens. “Apart from compensating the victims, one would hope that this type of claim would reduce the future unlawful behaviour of the state. Instead, it appears that the state seeks to avoid accountability by limiting these damages claims. This is not the type of just, decisive action that taxpayers are expecting,” says Williams.

Potential future tax increases are also on the cards. “Within the context of several years of tax increases, including the 1% increase in VAT from April 1 2018, there is concern around where further taxes are supposed to come from,” says Williams. “Given that a regressive tax, VAT, was already increased, this demonstrates that there is very little room to move on the tax side.”  

Williams believes that, since taxpayers are already "feeling the pain", this needs to be shared by government officials. “Taxpayers want to see an absolute wage freeze, and no payment of any discretionary amounts whatsoever, for all civil servants earning over a certain threshold amount. Perhaps the tax bracket where taxpayers move to a 36% marginal tax rate could be used, with this being R423 300. In this way, lower income earners would be shielded, but all higher income earners within the civil service would be affected.”

Momentum Investments: Tax underperformance is worrying

The budget cannot be regarded as fiscally prudent - high deficits, expenditure growth outpacing revenue growth by 3.5% on average initially and a rising debt ratio should be negative for bonds and the currency, says Herman van Papendorp, Head of Investment Research & Asset Allocation at Momentum Investments.

"The flat tax-to GDP ratio, the large tax shortfalls despite additional taxes and the poor tax buoyancy in recent and coming years could indicate that SA is close to the inflection point on its Laffer curve so that higher tax rates in future are unlikely to generate much higher tax revenues

"Although there seems to be acknowledgement from government that future fiscal improvement will have to be driven by spending restraint, particularly on the public sector wage bill, the difficulty of discussions with labour on the latter and the magnitude of the fiscal problem mean that future tax increases are contemplated

Lagging tax collections is widespread across every single revenue grouping, but most worrying is the underperformance in the big revenue categories of personal income tax, VAT and corporate tax, says Van Papendorp.

Old Mutual: Moody's will run out of patience 

The minister included a very realistic statement of all the problems. However, he revealed no action on the deficit and spending cuts that were too small, as well as nothing new on economic policy and nothing yet on Eskom’s debt, says Old Mutual Investment Group chief economist Johann Els.

"Therefore, the Medium-Term Budget Policy Statement again reveals a statement of intent, but no action and I expect Moody’s to run out of patience this Friday leading to a ‘negative’ outlook."

Investec Asset Management: No hard decisions

Without dealing with the wage bill, very little can be done about government expenditure. Since 2006, the government wage bill has grown from R154bn to R518bn. With no improvement in public sector service delivery in that period, that makes no sense, says Nazmeera Moola, head of SA Investments, and analyst Sisamkele Kobus.

"Going forward, government needs to find R250bn in expenditure cuts over the next three years. Bear in mind that a one percentage point increase in the VAT rate raises R25bn in extra revenues." 

The approach taken by the finance minister and National Treasury is best summed up by quoting from the budget speech: “There is no point in publishing a policy statement if it simply means publishing the budget three months early. The purpose is to open up the debate before the (actual) budget is finalised. 

"Unfortunately, it seems unlikely that the financial markets will give the government the time to make these decisions. South Africa has been given the benefit of the doubt too many times in the past – and has yet to make any of those hard decisions. Is President Ramaphosa ready to take on unions and cut government employees? Can we realistically expect below-inflation wage increases from 2021/22?"

Moola and Kobus expect Moody's to move SA to a negative outlook on Friday, which it would aim to resolve in 18 months’ time. An even worse than expected outcome would be if Moody’s moves SA to a negative watch (rather than a negative outlook), which it would aim to resolve in three months’ time. "Should Moody’s somehow decide to leave SA’s rating outlook unchanged, it might convince the markets also to give SA the benefit of the doubt – again!"

BUSA: Where is the Eskom plan?

"Unfortunately, while the minister of finance has identified that South Africa 'spends more than it earns', that 'things need to be done differently' and 'there is no time left to act', there is little that indicates the rest of government understands the seriousness of the economic crisis," Business Unity South Africa said in a statement.

"(The) minister recognises that government cannot continue to throw money at Eskom and other state-owned enterprises; it still has not presented a clear plan to resolve the financial crisis at the utility. We are deeply concerned by statements by members of the Eskom board in Parliament that they are under political pressure to avoid making difficult business decisions.

"The plans to reduce expenditure by R150bn over the next three years and achieve a main budget primary balance by 2022/23 will require determined political leadership by the president and the support of his Cabinet. To date, efforts to reduce state expenditure and the public service wage bill have not produced the desired results."

PricewaterhouseCoopers: Rating agencies won't be pleased

Using the analogy of a team sport like rugby or football, a report by auditing firm PricewaterhouseCoopers likened Mboweni’s mini budget to a best kick into touch in a ball sport, which relieves pressure on the players.

It said ratings agencies, which may be seen as referees, were “likely to be unpleased” with the kick, “thereby building the pressure on the National Treasury heading down the road to February 2020”.

According to the report, the medium-term budget will “certainly push debt metrics beyond critical (downgrade) levels” with government gross loan debt increasing from 56.7% of GDP in 2018/19 to 71.3% of GDP by 2022/23, in the absence of policy adjustments.

"On a positive note, the government has a prudent debt management process in place and its debt portfolio mix remains well managed by international benchmarks.

"The National Treasury uses international benchmarks for structuring its debt portfolio and remains within these limits. Interest, inflation, currency and refinancing risks are under control on accumulated debt."

Mazars: Is there enough political will?

One of the most concerning points raised in the medium-term budget speech is the issue of South Africa’s national debt, which is in serious danger of careening out of control if government does not take decisive action, says Mike Teuchert, national head of Taxation at Mazars.

"Proposed measures like the freezing of salaries for politicians, review of subsistence allowances for top-level government employees over the next few years and downgrading their flights to economy class is certainly sending the right message to the South African public.

"In addition, Mboweni has also highlighted that the growth in the public wage bill needs to be brought in line with inflation. Time will tell whether there is enough political will to implement these measures with the desired outcome."