South Africa stuck in a trap

For the past decade and a half, South Africa has been stuck in a low-growth trap, and tough decisions will need to be made to escape.

Business Leadership South Africa CEO Busi Mavuso explained in her latest newsletter that the country’s Budget debacle over the past few months was primarily due to this “low-growth trap”.

“The reason this budget process has been so difficult is because of very mediocre economic growth,” she said. “If we want to achieve sustainable public spending, we need growth that generates government revenue sustainably.”

As it stands, Mavuso said South Africa’s politicians must make difficult choices, especially since the country’s economic growth expectations have been dampened. 

These lower expectations translate into less tax revenue available to the government, as businesses will be less profitable and consumer spending will be more subdued. 

“The situation we must budget for is now worse than two months ago,” she said.

Mavuso highlighted that South Africa’s new Budget will be made more difficult because it cannot increase the country’s debt levels.

Doing so would risk compounding the country’s bleak economic outlook, and risk some of the National Treasury’s hard work turning around the crisis that government finances were in five years ago. 

“Ratings agencies have noticed and have improved the outlook for our credit rating. We need to work toward regaining the investment-grade credit rating that we lost in 2020,” she said. 

“Doing that will result in a lower cost of debt for the government as well as the whole economy, providing a kicker for growth.” 

“If we do the opposite and debt levels go up, you can expect investors will demand higher interest rates to buy the government’s debt, consuming more of our tax money and damaging economic growth.”

Mavuso explained that this leaves the country with only two real choices: increase taxes or decrease government expenses. 

Government has two choices

The first option has already been partly ruled out, as the National Treasury’s initial proposal to increase the value-added tax (VAT) rate was roundly rejected by other members of the GNU. 

“The choices are then to find other taxes to implement or expenses to cut,” Mavuso explained. However, she said there isn’t that much tax that can be raised other than through VAT.

“Some political parties have called for such tax increases, but personal income taxes and corporation taxes are already high by global standards,” she said. 

“So, when they go up more, people and companies simply shift economic activity out of the country.”

This could mean that South Africa collects even less revenue than before the tax hike, because relocating businesses would lower corporate income taxes and cost jobs, resulting in lower personal income tax. 

Some have also suggested that SARS should be pushed to collect more taxes through efficiency improvements. Mavuso said that, while the taxman should aim to do this, it is not a prudent way to budget. 

“Those of us in business know that it is easy to spend money, but much harder to budget to make money. Budgeting must be prudent, and relying on excess tax collections is not,” she said.

Therefore, she said the only way forward is to reduce expenditure to within the government’s means. “That is always politically difficult – it means there will be losers,” she said. 

“Understandably, no politician wants to be the one to say that something can no longer be done by the government.” 

“But every year, the government sets up new projects and creates new spending lines. That is well and good, but it leads to a proliferation of entities, not all of which deliver value for money.” 

Regarding cutting expenses, Mavuso said South Africa needs to maturely and honestly assess which parts of government are delivering value to taxpayers.

In addition, the country will require the political bravery to make the necessary decisions that won’t please everyone.

“As the budget situation shows, growth is critical for our country. We must escape the low-growth trap we have been in for a decade and a half,” Mavuso said. 

“Doing that will take brave and innovative thinking, especially in the new global environment we find ourselves in. I look forward to sitting with business and government colleagues to do that.”