Finance Minister Malusi Gigaba must ensure that the message of the next Medium Term Budget Policy Statement (MTBPS) is credible – and builds confidence in the road ahead for the SA economy, in ways which reduce policy uncertainty. That’s the word from Professor Raymond Parsons of the North-West University School of Business and Governance. He was speaking at the release of the Q3 2017 Policy Uncertainty Index (PUI) today.
Professor Parsons said that although the MTBPS is only late in October, uncertainties about both the revenue and spending sides of SA’s public finances were already apparent in Q3 of this year.
“Much lower economic growth has consequently seen declining tax revenues, with several experts projecting that the shortfall could be in the region of about R40bn -R50bn. Some challenging decisions arise from this fiscal situation, which makes the next MTBPS not only a very salient one, but also a strategic opportunity to clarify policy.”
He said that on the spending side, there have been additional commitments that were not envisaged in the 2017/18 Budget.
“These uncertainties include just how much will ultimately be diverted to shoring up SOEs like SAA and Eskom, as well as financial provision for the outcome of the ‘fees must fall’ campaign. These will determine to what extent it will be possible for the National Treasury to keep the commitment to fiscal consolidation on track.”
How this increasingly limited fiscal space will be reflected in the various key debt ratios that the markets and credit rating agencies take seriously remains to be seen, – but slippage seems inevitable.
He added that the chance of SA being hit by further investment downgrades is high.
“The perception that will matter is whether overall state spending is broadly perceived to be under control and that wasteful expenditure is being meaningfully addressed.”
According to Parsons, however skilfully Minister Gigaba crafts the MTBPS, there is still likely to be a significant residual shortfall that can only be addressed in the main Budget in February 2018.
In an effort to ‘balance the books’ earlier this year, personal taxes and the fuel levy were the principal tax increases in that Budget.
“Whatever the fiscal adjustments that emerge from the pending MTBPS, there is the real prospect that individuals and business will face substantial uncertainty from a host of tax decisions in the main Budget later, some of which emanate from the on-going work of the Davis Committee on tax reform.”
He said the tax agenda for 2018/19 will also be influenced by political factors, bearing in mind that by then SA will be another year closer to the general election of 2019.
“This balancing act will therefore not only be between the future burden of different taxes, but also between the fiscal consolidation required by the credit agencies, on the one hand, and what is needed for inclusive economic growth and job creation, on the other.”
Unless SA is going to drift into a negative ‘tax-and-spend’ cycle, it needs to implement the structural reforms required to promote sustained growth and employment, Parsons said.
“While it may be unlikely that the MTBPS is the place to look for such reforms, it would be necessary for Gigaba to at least give an update on his recent 14-point plan with its deadlines, as he needs to prove the sceptics wrong.”
The PUI has edged further into negative territory, with results for Q3 2017 showing an average index score of 53.6, reflecting a further rise over the PUI of 53.1 in 2Q 2017.