To address the current budget stalemate, the government must improve on revenue collection, chase after tax dodgers and reduce public spending but more significantly, devise a tangible budgeting strategy instead of working on a hoped-for growth.
This is one of the proposals coming from the Johannesburg-based Centre for Development and Enterprise (CDE) in reaction to the 2025 Budget that had since been postponed.
Minister of Finance Enoch Godongwana was forced to postpone the tabling of the Budget in Parliament, after partners in the government of national unity (GNU) disagreed on the 2% increase on the Value-Added Tax. The increase would have seen the VAT rising from 15% to 17%.
Different parties and stakeholders including business – big and small, and organisations representing the interests of the poor objected to the consumer tax raise. This forced the GNU to go
Different parties and stakeholders including business – big and small, and organisations representing the interests of the poor objected to the consumer tax raise. This forced the GNU to go back to the drawing board and the Minister would present the Budget on 12 March most probably with a revised VAT figure or no increase at all.
CDE urged the partners in the GNU to map out a plausible growth strategy as a condition for passing the budget. On Thursday CDE released a report titled Dealing with the Budget Crisis: CDE Recommendations containing its proposals.
In the report, the body argues for a series of urgent reforms including proposals on how to reduce spending in the short term and funding SARS to find more money from tax evaders.
According to the CDE, the GNU should open new revenue streams that focus on reducing existing tax breaks for the better off, and introducing a compact, signed by all GNU partners, to speed up fundamental reforms for growth.
CDE executive director, Ann Bernstein said: “This day was always bound to happen. For the last 15 years, government has spent significantly more than it has raised in tax revenues. In the process, it has driven debt levels from less than 25 per cent of GDP to more than 75 per cent.”
“Additional borrowing was used to finance higher salaries in the public service, introduce ‘free’ higher education, roll out the Social Relief of Distress grant, bail out state-owned companies (SOCs) and, increasingly, cover debt service costs – by far, the fastest growing spending item on the budget. All of this at a time while economic growth was falling.”
“As a result of reckless economic policy, we sit today with a R190 billion hole in the three-year Medium Term Expenditure Framework (MTEF),” added Bernstein.
Outlining on what should be done to address the situation, CDE suggested that the GNU can either raise taxes and other forms of revenue, reduce spending or go deeper into debt. It said none of the options the GNU faces is painless.
“Hope is not a strategy: A budget cannot be drafted on the basis that hoped for growth will materialise as actual growth. Nor can it be drafted on the basis that someone will cut spending at some point in the future to eliminate waste and inefficiency,” said Bernstein.
Dismissing the idea of reliance on hoped-for growth budgeting, she said the March 2025 budget has to be based on real estimates of “how much we will spend, how much we will raise in revenue, how much we will borrow and how much the economy will grow – this can’t be an exercise in ungrounded thinking about growth if we are to keep credibility in the markets”.
Raise revenue, but not taxes
“The rapid increase in government borrowing over the last 15 years is a major reason why South Africa is stuck in its current low-growth permacrisis. We are deluded if we think we can borrow our way out of trouble,” said Bernstein.
Because SA is already highly taxed, and government’s credibility as a provider of basic services is catastrophically low, a substantial rise in taxes is undesirable. Tax hikes will lead to more tax avoidance and evasion, while the negative impact on growth will substantially reduce the revenue that government can generate through any tax increases.
“The best and least harmful way to raise more revenue is to improve the efficiency of revenue collection. In this regard, the GNU should immediately provide SARS with more resources so that it can pursue tax evaders and tax debtors,” said Bernstein.
“Another revenue-raising measure is to reduce targeted tax rebates, especially those whose benefits are highly concentrated among the better-off. This is much more reasonable than a 2%-point rise in VAT, which is highly regressive and bound to have destabilising political effects,” she added.
CDE calculates that halving the medical aid rebate, for example, would return about R50 billion to the budget over the MTEF, while halving rebates for the automotive industry for tariffs paid on wholly imported vehicles would also yield significant revenues.
Reduce spending
If government has to choose between more debt, more taxes or less spending to fix SA’s public finances, CDE has long advocated that the emphasis needs to be on reducing spending. This is partly because, government spending is grossly inefficient.
It suggested that there are too many low-impact programmes on the budget; too many people in leadership positions who cannot do their jobs or spend public money efficiently and too many public servants who do not (or cannot) do their jobs;
Also, there are too many failing SOCs (state-owned companies) that are run inefficiently and continue to fail because they expect to be bailed out at some point; and too much corruption and elite looting of the state.
CDE recommended spending cuts the government
Should, firstly, consider withdrawing from its recently agreed public sector wage agreement (5.5 percent) and implement a 3.5 percent wage increase, which would save R100 billion over the next three years.
The body said even if an amount was allocated to accommodate the employment of much-needed additional doctors and teachers, savings of R60 billion over the three-year MTEF would be possible.
Secondly, the government shouldchange procurement policies that keep public sector purchasing costs higher than they should be. If government stipulated that goods and services budgets will rise by no more than 3.5% in each of the next three years, instead of the 5.4% pencilled in the rejected budget, it could realise savings of R50 billion.
“This would not affect service delivery if it were done in conjunction with a reconsideration of localisation policies that drive up costs. To get power plants working more effectively to reduce loadshedding, Eskom has been allowed to contract directly with equipment manufacturers, overriding localisation requirements. This experiment has worked and should now be applied to the rest of the state.
Thirdly, the government should immediately commit to an urgent review of payrolls to identify and eliminate ‘ghost workers’ drawing public sector salaries, with the results of the review tabled in Parliament. – NewsSA.