Budget 2015/16: Is the new South Africa sustainable? By Professor Matthew Lester 25 February 2015

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1 Budget 2015/16: Is the new South Africa sustainable? By Professor Matthew Lester 25 February 2015 In these tough times it is difficult to take a long-term view on sustainability. So when it comes to the National Budget speech the media concentrates on the immediate implications such as tax increases and regurgitating seemingly meaningless numbers. The 2015 State of the Nation Address SONA degenerated into a slanging match, precipitated by the very important governance issue of Nkandla. Perhaps the biggest disgrace in the Nkandla debacle is that it has turned our political leaders attention away from a country in crisis. Believe it or not, South African tax base could pay for Nkandla in just over 2 hours. What about the other 8758 hours in a tax year? Or the hours between now and 2030, the long-term D-day for the achievement of the objectives of the National Development Plan NDP (released August 2012). An integral part of good governance is to create a sustainable plan for the future. There is far more to governance than the pedestrian exercise of accepting and arguing about things as and when they happen. Risks must be identified in advance. The question that arises from Budget 2015/16 is do we have a sustainable development plan for all South Africans? Growth rates The NDP is based on some fundamental assumptions: To have any hope of achieving the objectives of the NDP, RSA will require growth rates above 3%. The 2014/15 national budget was based on an expected 2,5% and it looks like we will achieve 2%.

2 Following the financial crisis predications made by the World Bank, the IMF and National Treasury were that RSA growth rates would be above 3% for the 2015/16 year. These have been continually revised downwards and today 3% growth is not on the radar screen. The 2015/16 budget proposals are now based on 2% for the 2015/16 financial year. Perhaps this in itself should call for an overhaul of the NDP. Population Growth There are, of course, aspects of RSA that are growing!

3 The StatsSA 2014 mid-year report reflects that there are currently 53 million South Africans. The NDP is based on the prediction of there being around 58 million of us by 2030, and that thereafter the population growth would level off. However, things have changed. One of the achievements of the Zuma administration is tackling the HIV/AIDS pandemic. South Africa s HIV/AIDS death rate has halved in 9 years. Thus revised predictions are that there will be at least 64 million South Africans by And the trajectory shows no peak or sign of leveling off. The Grant system The grant system currently supports 16 million South Africans and costs RSA around R188 billion per annum. Many taxpayers complain about the grant system - They drink and smoke it all. Or blow it on airtime is the stuff one hears at social occasions. The response could be, If they do drink and smoke the lot then half goes back in sin tax anyway. Unless they smoke contraband from Zimbabwe, that is. However a recent World Bank study of South Africa reflects that the current grant system is working and that the grants are not being squandered on a wide scale.

4 The World Bank study shows that the poorest decile of RSA only spends 1 percent of their limited income on booze and smokes. And another 2% on communication. More than 50% of the spend goes on food, roof, energy and water. And a further 8% goes on the cost of getting to work or school. One cannot fault that. By contrast the richest decile of South Africa have a very different life.

5 Even though the rich enjoy better food and accommodation they only spend 20% of their budget on the absolute basics. That leaves the discretionary spend at 39%. It is quite remarkable that both rich and poor spend about the same proportion on transport, booze, smokes and communication. The grant system has, despite the grumbles of taxpayers been a fantastic success and has largely contributed to reducing South Africa s Gini co-efficient to 0.59.

6 South Africa has made fantastic progress in reducing its Gini coefficient, perhaps more than any other developing country in recent years. But please remember RSA started from a simply appalling base of over One would think with an additional 6 million South Africans to feed by 2030, this would place further unsustainable pressure on the system. But no, National Treasury estimates reflect that South Africa will be able to afford the current grant system. Remember the child grant ceases at 18 and RSA s birth rate is not increasing dramatically and those who receive the old age grant cannot stay there forever. Therefore the current grant system is sustainable. The bulging middle

7 Then there are those without grants. That s the entire population between 18 and 65 who are not disabled or receiving UIF benefits. National Treasury estimates that the 18-to-65-age group is going to start bulging. No grants and no real growth in jobs, with an ailing medical system remains their lot in the new RSA. Now that s a frightening prospect. All they really have is votes. And the plan is? RSA plans to introduce National Health Insurance NHI at some stage in the next 5 years.

8 But surely as the economy currently stands almost doubling the medical bill of RSA is not sustainable? The policy changes of government will cost a fortune. And with tax revenue streams showing little real growth, the policy changes are not sustainable in the long-term.

9 Conclusion The immediate challenge, as per the 2015/16 National Budget Speech, is to contain the national debt trajectory by reducing state expenditure by R15 billion and increasing taxes by R15billion. There is space to achieve this without too much discomfort.

10 But even if RSA achieves this the question remains, do we have a sustainable plan for the future? Or do we keep juggling meaningless numbers while the bulging middle keeps growing with no end in sight? National treasury puts it thus: New social policies proposed in the NDP, including NHI, the expansion of vocational training and significant growth of public works employment will place significant pressure on the fiscus in the coming decades. Fiscal sustainability requires that one (or a combination) of the following factors should accommodate structural increases in spending: Acceleration of economic growth Increases in the structural level of taxation Shifting resources from other priorities Government will never achieve the objectives of the NDP alone. Clearly there is work to be done by all South Africans in all sectors f the economy. References South Africa s long-term fiscal choices. National Treasury Fiscal Policy Workshop 5 November 2014

11 Fiscal Policy and Redistribution in an Unequal Society. The World Bank. National Treasury Fiscal Policy Workshop 5 November 2014 National Budget review 2015/16 Source of this article - THANKS TO THE AUTHOR: Matthew Lester Associate Professor, Rhodes Business School. Matthew Lester, BCom (Rhodes) CA(SA) H Dip Tax Laws (Wits), is an Associate Professor at Rhodes Business School. In 2001, he was the winner of the Vice-Chancellor's award for distinguished teaching. Apart from teaching at Rhodes, Matthew lectures to a wide range of South Africans on taxation and money matters. He also writes the weekly column Tax Talk in the Sunday Times.