The Parliamentary Budget Office (PBO) says that National Treasury is shooting itself in the foot by trying to solve South Africa’s budget problems by cutting spending – and that the government needs to reform the entire structure of the economy to address unemployment, inequality and poverty.

The office, which is a support structure for the finance and appropriation committees in both houses of Parliament, made submissions on the medium-term budget review presented by finance minister Enoch Godongwana last week.

The group acknowledged the pressure on government revenues, but argued that South Africa – as one of the most unequal countries in the world – has room to draw more tax revenue from its “relatively broad tax base”.

“Tax remains an important tool for the redistribution of income and wealth, more so when there is extreme structural inequality,” it said.

“The tax base reflects extreme levels of unemployment, poverty and inequality and failure to structurally transform the economy. The government should use the fiscal policy to transform the structure of the economy.”

Revenue collections are projected to be R56.8 billion lower than projected in the 2023 Budget due to faster-than-expected fallen commodity prices and rising value‐added tax (VAT) refund claims.

Lower tax revenue and higher expenditure have contributed to a higher budget deficit and slightly more government debt, contrary to the projections of the NT in the 2023 Budget Review.

The budget office said there are several potential areas for more tax to be collected, including:

• An “excess profits tax” could be imposed on companies that used the inflation upsurge to boost profits to make up for their Covid-19 losses. Excess profits from the interest rate hikes could also be targetted.
• Windfall taxes for sectors that benefitted from the commodities boom
• A review of tax incentives and the removal of those that are no longer effective
• A progressive tax on wealth
• The Financial and Fiscal Commission, meanwhile, added that wealth taxes can be expanded by intensifying the taxation of donations and estate duties.
• It also suggested that the carbon tax be hiked and that the property tax base be widened.

National Treasury already outlined its intentions to raise an additional R15 billion in taxes in 2024 – details of which will be contained in the 2024 budget.

While wealth taxes have been floated repeatedly by outside parties, Treasury itself has not indicated that this is the route it will be going.

Economists anticipate that the R15 billion will be raised by not adjusting tax brackets for inflation.

Self-defeating

The budget office took a generally negative view of the MTBPS, noting that it lacked credibility, given the government’s track record with implementing promised reforms and failure to meet most of the targets set out by the National Development Programme that governs policy.

More broadly, it argued that the Treasury’s goal of pursuing a budget surplus in the current economic environment – through budget cuts and more debt – will likely do more harm than good in the long term.

“Extraordinarily high levels of structural unemployment, poverty and inequality, market concentration, financialisation, misallocation of capital, and inadequate state capacity to deliver infrastructure projects all point toward continued poor investment and economic growth performance,” it said.

“The credibility of the fiscal policy framework will remain in question unless the government acknowledges the urgent problems facing the economy – and that electricity availability is but one of these urgent problems.”

The PBO criticised Treasury’s austere approach to the budget – “staying the course”, as it said – noting that it has not provided any evidence to show that this route would deliver the promised outcomes.

On the contrary, the government’s failure to reach its NDP targets and its consistent failure to reduce deficit and debt levels of the past decade prove that its consolidation approach has not worked.

“The choice of fiscal policy framework over the past decade has failed to support a developmental role for the state, economic and industrial transformation and reducing inequality through redistribution of income and improving living conditions,” it said.

The budget office acknowledged the role of load shedding in the ongoing financial crisis, but said that fiscal consolidation is likely to make things worse.

Citing international research, the group said that this strategy leads to permanent reductions in GDP and higher debt levels – even in countries that don’t have load shedding to deal with.

If GDP is permanently reduced and debt pushed higher, the country would be forced into a loop of trying to pay off debt with less means to do so. Effectively, the Treasury’s economic plan is self-defeating and contradictory.

Instead, the office argued that the government should move to further protect social spending and tackling poverty, unemployment and inequality.

“There are huge costs associated with the very high levels of UPI and insufficient resilience to domestic social and political instability, climate change events, the lasting effects of Covid-19 and possible future pandemics, geopolitical conflicts, as well as economic and financial instability,” it said.

“These risks not only undermine the credibility of the fiscal framework but also threaten democratic institutions.”

---

Read: The one tax that experts want Godongwana to hike