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South Africa has reached its ‘fiscal cliff’ as public sector remuneration, welfare payments and debt service costs have effectively absorbed government revenues.
In a written response to Finance Minister Tito Mboweni’s Medium-Term Budget Policy Statement (MTBPS) this week, Prosecutor Cliff Study Group (FCSG) said these three costs have risen steadily over the past decade.
He showed that these elements made up:
- 55% of tax revenues in 2007/08;
- 75.5% of tax revenues in terms of the February 2020 budget;
- > 100% of estimated tax revenue in terms of MTBPS 2020.
The group said South Africa is likely to hit the fiscal cliff this year based on the assumption of a revenue reduction of around R312.8 billion.
This will be combined with a one-time increase in social grant payments of R41 billion, additional borrowing requirements for government debt and a concomitant increase in debt service costs of R3.7 billion in 2020/21, said.
The FCSG said it has been predicting a fiscal crisis since 2014 and that “now the fiscal cliff has been reached.”
“Although some recovery could follow after the 2020/21 spending spike; we have seen a structural change closer to the cliff, “he said.
He added that steps must now be taken to avoid a permanent fiscal crisis and that disclosure of trends in public service compensation data should continue.
The group said it was also important to protect institutions that are still functioning well, but refrain from helping non-essential failed state-owned companies such as Alexkor, Denel, SA Express and South African Airways.
He said the government should also limit or reduce executive pay and bonuses in state-owned companies.
“Only very rapid economic growth can change this position,” the FCSG said. He added that he reserves some skepticism regarding the medium-term forecasts, as they are based on a strong “V-shaped” recovery.
He said the willingness of global lenders to provide funds; Nor should it be confused with South Africa’s ability to return it.
“As it is clear that the Treasury is already finding it more difficult to acquire sufficient liquidity in local financial markets, budget deficits must be reduced.”
Just not good enough
In a separate presentation, Old Mutual’s Head of Economic Research Johann Els expressed concern about the government’s ability to meet its debt targets.
“While we congratulate the Finance Minister for his constant attention to fiscal consolidation, we consider it a great shame that the ‘active scenario’ of the supplementary budget in June to stabilize the debt ratio at 87.4% by 2023/24 has been abandoned. in four months, “he said.
“In June, we saw the commitment to the active scenario as very positive to reduce the risk of a so-called ‘fiscal cliff’ or a sovereign debt default.
Els said the new debt-to-GDP stabilization target of 95.3% two years later “ is simply not good enough ” given the inherent risks to achieving the proposed savings in the wage bill that constitute the largest part of the improvement foreseen in the Budget deficit.
Ongoing risks around the growth profile add to this risk of not achieving debt stabilization even later, he said.
“We are also relieved to see the continued focus on spending cuts rather than significant tax increases, but we believe that larger cuts should have been made to non-wage spending, and therefore we are disappointed to see the significant reduction in non-salary spending cuts compared to June budget.
“So there are commendable aspects of MTBPS, but we believe that the seriousness of the situation calls for faster and more decisive action.”
Read: Businesses and wealthy South Africans should pay more taxes: Expert group
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