Budget speech: fiscal sustainability depends heavily on boost in growth rate

Issued by North West University
North-West, Feb 21, 2019

The 2019/20 budget speech, given to Parliament on Wednesday, 20 February 2019, was a frank and realistic assessment of the extent to which the economic and fiscal challenges facing South Africa had escalated since the Medium-Term Budget Policy Statement (MTBPS) or mini-budget was presented in October last year.

This is according to renowned economist Prof Raymond Parsons from the North-West University's (NWU's) Business School.

According to Prof Parsons, Finance Minister Tito Mboweni nevertheless sought to add financial and fiscal dimensions in a consistent way to the broader vision outlined in the SONA earlier this month.

"However, there was very limited room to manoeuvre, mainly due to muted economic growth on the one hand, and to the new annual allocations of about R23 billion to Eskom over the next three years on the other," says Prof Parsons. "The key fiscal deficit ratios over the next few years are therefore set to deteriorate from what was outlined in the MTBPS, making this a budget of unenviable compromises."

He says Mboweni's continued commitment to fiscal sustainability is nonetheless welcome, especially in implementing serious new measures to control state spending, partly to compensate for the large allocation to Eskom.

"Since tax revenues are down, and given the tight budget, an increase in the tax burden was inevitable. The tax increases chosen will probably do the least harm economically," he adds.

However, Prof Parsons says, if combined with the failure to allow fully for 'fiscal drag' on personal tax, the other tax and fuel levy hikes will reduce disposable income and could inhibit consumer spending.

"This may constrain consumption as a growth driver. The small tax base and 'tax buoyancy' thus remain problems, which need structural solutions if the persistent rise in the tax burden is to be reversed.

"Hence, there are still long-term risks inherent in the fiscal outlook. These widespread concerns will continue to shape future fiscal imperatives, unless South Africa can raise its growth rate considerably. The 1.5% to 2% growth expectations over the next couple of years are simply not good enough to tackle the country's socioeconomic challenges in the period ahead."

Prof Parsons says to avoid precipitating a "debt trap" or investment downgrades in the period ahead, it is necessary to implement the structural reforms that can put the economy on a much higher growth trajectory.

"What clearly shines through the fiscal gloom of recent years is the overwhelming need for a dramatic and sustainable boost in South Africa's flagging growth rate on the basis of structural economic and governance reforms.

"Once the elections are out of the way in May, South Africa must concentrate on the fundamental measures and projects that will make it the preferred investment destination required to underpin higher inclusive growth and job creation."

Contact person: Willie Du PlessisContact number: (018) 299 4915