How Far to Kick Can Down the Road

Budget impasse is about politicians hoping problems will solve themselves, and manna will fall from heaven.

This is the first of two essays about the National Budget deadlock. In this essay I explain the issues under consideration. Next week I will share my views on what should be done.

It is now fodder for the pundits that for the first time since South Africa became a democracy the finance minister was unable to table the National Budget. At the last minute the Cabinet freaked out about the proposal to increase VAT from 15% to 17%.

Such an increase would be a stunning move, of course. There are simply too many South Africans battling to string three meals a day. Many live on one meal a day, while some have one meal every few days. Even middle-income families are struggling due to the sheer volume of unemployed relatives they must carry, for whom the VAT increase would have a debilitating effect.

So, is the minister of finance insane? The answer is NO, and there are some facts that need to be placed on the table so that South Africans can henceforth form informed political opinions and exercise their democratic rights accordingly.

The days of Trevor Manuel when the finance minister would strike a sunny tone, dishing out fiscal treats and trinkets from an economy that was at one point growing at more than 5% per annum are long gone. It’s different now. The government has hit a brick wall with very few options in terms of money to spend.

Firstly, the amount in dispute now is between R60bn and R63bn. That is what the government would raise from the increase in VAT. Assuming the economy were to start growing at over 3% per annum, then that may well increase but we are not there yet.

Raising an equivalent amount of money in one year from personal income tax would entail a 10 percentage points increase for the top four income tax brackets. In case people think I am talking about mega millionaires; the top 4 income tax brackets begin at an annual income of just over R521 000 according to the latest income tax table. That means people who earn less than R51 000 per month!

They would get wiped!

Failing that, the other choice is to raise company taxes from 28% per annum to 37% per annum. This is not sustainable either because the government has no control over how employers respond when they restructure their cost bases. They may retrench and/or suspend expansion plans that would have created more jobs. To be effective in the long tax must enable and not hinder investment and competitiveness against other countries. 37% is too high.

That leaves us with borrowing, which has exploded in the last decade with little to show for it. In 2014 South Africa’s debt was just over R1.5trn, now it is over R5.2trn. In that time, GDP per capita has dropped instead of increasing while the burden of national debt per working citizen has increased. All current proposals considered, South Africa will be spending more than R410bn per year paying interest on its debt, or nearly R8bn every week!

it is important for South Africans to understand that of the BRICS countries, South Africa (10%), Brazil (14.7%) and Russia (15%). India pays just over 6.7% while China pays 3.1%. The more we borrow, the higher the interest we are going to pay, which means if we do not effectively manage the current borrowings, we could see ourselves paying close to R500bn annually, or R9.6bn per week.

Governing Is About Choices

What this controversy reveals is an old problem in South African politics. People in positions of leadership do not want to take tough choices. They prefer to comment on problems and state what they don’t want, rather than what must be done.

It’s easy for any of us to say we don’t want the 200-basis points VAT increase, none of us want tax increases. But the decision the country needs is what is going to be funded and what will not be funded.

So, in my estimation these are some of the issues that will be under consideration:

· The public sector wage agreement, which was unbudgeted for, will cost about R23bn. Government must decide whether it can afford it or not.

· Whether our armed forces, which are nearly collapse in terms of resourcing and affected by resultant morale problems, will get funding. Ideally there should be an additional R8bn or so for this purpose, but that is likely gone.

· Between R9bn and R11bn for early retirement packages to reduce the public sector wage bill in the medium term.

· Money for the Passenger Rail Agency to install signalling equipment so that South Africans can have a train running every 5minutes instead of every 40-minutes. Minister Barbara Creecy told me in Parliament that PRASA needs about R120bn to meet its mandate. I doubt they will get much, and whatever was going to be allocated is likely to be cut.

· Additional allocations for South Africa’s crumbling infrastructure are likely to be reduced significantly.

In essence, the issue of our terrible national finances is going to be kicked down the road once more, and be replaced with empty rhetoric and slogans by people who want to talk about problems, rather than solve them.

South Africans Are Not Children

South African voters are not children, and we must stop treating them as such. That means we are must tell them the truth, and that is that the over R4trn borrowed between 2014 and 2024 has been wasted. There is little to show for it, which means we must pay again for the same things we were supposed to have already paid for.

That means we cannot pay for everything that all of us wants, so we must prioritise. This is what this current impasse is about – grown-ups in positions of leadership who do not want to prioritise and take the heat for the things they choose to do later.

In my next essay (next Monday) I will write about what I believe needs to be done to get as many of the results we want, and where we must make tough choices not to invest money. For now, let us stop pretending that the problem is the finance minister. The problem is a group of politicians who want to believe that the country still has lots of money when that is no longer the case.

Ends.

Songezo Zibi is the National Leader of Rise Mzansi, a member of the South African Parliament and an author of books on politics, history and economy.