Caught in between multiple demands and constrained resources

Pravin Gordhan, the current Minister of Finance, recently delivered his 2016 Budget Speech. While the budget of R1.5-trillion will be the largest ever in the history of South Africa, Mr. Gordhan faced a difficult task in balancing the multiple demands of the various government agencies while dealing with constrained resources.

The Treasury currently expects growth in the South African economy to be just 0.9 per cent this year, after 1.3 per cent in 2015. To the most part the Government blames the slow growth on depressed global conditions and the impact of the still ongoing drought in the country.

Mr Gordhan laid out the starting point of his task:

„We are obliged to confront the impact of slow growth on our public finances, while continuing to respond to the expectations of citizens and communities for improved education, reliable local services and responsive public administration”


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and went on to ask:

“How does the state deal with such complexity? What should we prioritise?”

He gave a crisp summary on what is already working quite well in South Africa and what needs improvement in the future:

The tax administration in general and the social grants system on the positive side vs. corruption, waste and bailing out state entities on the negative side.

But when he laid out his plan to achieve this goal in more detail, it became clear that apart from pulling the usual plugs, not much innovation would characterise his approach:

The public sector will invest R870bn in infrastructure projects such as transport, energy, housing, health and water over the next three years. On the other hand, the fuel levy will rise by 30c/l, the duties on alcohol beverages and tobacco products will be increased by 6-8.5% and the effective capital gains tax will rise from 13.7% to 16.4% for individuals and from 18.6% to 22.4% for corporations.

The biggest part of the budget will remain with basic education (R218.8bn), housing & municipal development (R182.6bn), health (R168.4bn) and social protection (R167.5bn). But an increasing amount will also have to be spent on debt-service costs (R147.7bn). Overall, government spending grew 2.2% in 2015-2016 compared to the preceding fiscal year, despite the fact that the pace of fiscal consolidation has accelerated.

But the real pain for South Africans is to be expected in the following years when the government’s plan to reduce the budget deficit at a faster pace will come into effect. This will be achieved by limiting growth of the public sector wage bill and imposing further tax increases.

The proposal for the personal income tax rates stipulates an adjustment in the different categories of income which remain to increase progressively: The flat tax of 18% applies to all citizens earning up to R188 000 p.a. (previously up to R181 900). All incomes above will be taxed with a fixed amount plus a higher percentage of the surpassing amount. The highest tax rates applies to all income surpassing R701 301 p.a. and will amount to the fixed sum of R206 964 plus 41% of the amount above R701 300.

The tax proposal is expected to amount to an additional R18bn for this fiscal year and R30bn for the following two fiscal years combined. Therefore, the budget deficit is projected to fall to 3.2% in 2016-2017, 2.8% in 2017-2018 and even 2.4% in 2018-2019.

But all in all, the approach of Finance Minister Gordhan remains true to the ANC’s socialist ideals and does not really send out a signal to foreign investors that the conditions for investment are to be loosened in the near future.

But there is also room for hope with regards to a series of measures announced by Mr Gordhan to cut down government spending. For instance, a new national travel and accommodation policy will cut down conference costs and the costs of motor vehicles purchased for political office-bearers and no provision has been made for further guarantees for the struggling state-owned South African Airways.

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by Andreas Krensel