1. Update on south africa’s fiscal cliff presentation to parliamentary standing and select committees on the budget: february 2016
Jannie Rossouw
Head: School of Economic and Business Sciences
University of the Witwatersrand
Fanie Joubert
Senior Lecturer: Department of Economics
University of South Africa
Adèle Breytenbach

2. Summary
This presentation elaborates on earlier research, showing that South Africa faces the danger of a looming fiscal cliff:
Fiscal cliff is the point where social grant expenditure and civil service remunaration will absorb all government revenue.
The fiscal cliff is calculated on the basis of a continuation of expenditure trends since 2008.
South Africa can move from a fiscal cliff to a fiscal plato if populist choices can be avoided (trends in the 2016 budget provides tentative hope of this).

3. Social Spending
The South African government budget for social assistance for the 2016/17 fiscal year amounts to R140,5 billion.
This is about 10,6 per cent of total budgeted government revenue.
It is an average annual increase of 9,4 per cent since the 2007/08 fiscal year, when expenditure on social assistance amounted to R62,5 billion.

4. Social Grant Expenditure
Source: 2014 Budget Review: 44

5. Social Grants
The National Treasury predicts that the number of beneficiaries from social grants will amount to about 18,5 million people in 2028, based on current policies.
This growth is the result of the increase in the current categories of recipients (e.g. children under 18 or people over 60), owing to population growth.
There is no room to increase the categories of beneficiaries, e.g. children over 18 or all people over 60, as was envisaged earlier.

6. Civil Service Remuneration
South Africa can no longer afford its civil service
Civil serivce remuneration increased on average by 13,1 per cent per annum since 2008, comprising increases of:
5,9%: General annual increase in remuneration;
1%: 1 percentage point general annual increase above the inflation rate;
2,6%: Structural adjustments in remuneration in favour of more senior staff members in the civil service;
1%: Annual notch adjustments; and
2,6%: Growth in employment (more staff members).

7. Civil Service Employment 31 March 2005 to 30 September 2015
Central government
Provincial
governments
Total
% y:y
31/03/2005
31/03/2006
4.4%
31/03/2007
4.1%
31/03/2008
3.6%
31/03/2009
3.2%
31/03/2010
2.2%
31/03/2011
31/03/2012
2.9%
31/03/2013
1.3%
31/03/2014
2.0%
31/03/2015
-1.2%
30/09/2015
0,5%*
Figures exclude local authorities and public entities
*Quarterly and annualised figure for 31/09/2015
Sources: SA Reserve Bank, own calculations

8. Civil Service Remuneration, 2007/08 to 2018/19
2015 budget,
R billion
% of Government tax revenue
Percentage change
(% y:y)
2007/08
195.0
2008/09
232.5
19.2%
2009/10
273.1
17.5%
2010/11
309.9
13.5%
2011/12
346.0
11.6%
2012/13
375.0
8.4%
2013/14
Budget
9.7% Budget
2014/15
(437.0)
45.3
8.3% (7.1%)
2015/16
(476.7)
44.4
7.7% (9.1%)
2016/17*
(516.8)
44.5
6.3% (8.4%)
2017/18*
(551.5)
43.6
5.9% (6.7%)
2018/19*
n/a (590.8)
42.5
n/a (7.1%)
Sources: 2014 MTBPS, Republic of South Africa 2011:170, Republic of South Africa 2014a: , Republic of South Africa 2015: 59,
Republic of South Africa 2016: and own calculations
*Medium-term estimates

10. Civil Service Remuneration as
% of Expenditure
Source Coronation

11. Government Revenue by source: 2016/17
Source: Budget Review 2016: 210

12. Budget Balance and Debt
Source: SA Reserve Bank; *2016 Budget Review

13. Model for Government Revenue
Variable (name in model)
Assumption
Money supply (RM3)
Result obtained from econometric model
Disposable income (RYD)
Expected nominal GDP (Potential GDP + 5,9% inflation)
Prime interest rate (RPRIME)
Inflation plus 4.0 percentage points
Inflation (INFL)
Actual average annual South African inflation rate for the period 2002 to 2014 was 5,9%. This rate of inflation is used in the model for coming years (except 2015 = 4.6%)
*Annual GDP growth assumed for 2015 at 1,2%, 0,5% for 2016, 1% for 2017, 1,5% for 2018 and 2,0% for From 2020 the modelling is based on full-employment real GDP growth of 2,5% per annum, as calculated by Anvari et al. (2014) of the SA Reserve Bank.

14. Model fit

15. Scenario assessment No further real tax increases Social assistance:
Real and budgeted figures used till 2018/19;
Thereafter growth at inflation (5,9 per cent per annum) plus 1 percentage point.
Civil service remuneration
Thereafter growth at 10,5 per cent per annum:
General annual adjustment at inflation rate (5,9 per cent) plus percentage point; and
3,6 per cent per annum for notch increases, promotions and structural changes, but no further employment growth

16. Scenario: Result

17. The Way Forward
Economic growth is crucial. If growth disappoints, everything changes.
Targets set in the 2016 Budget are “cast in stone”!
Details of planned expenditure cuts must be announced urgently to ensure that progress against such commitments can be monitored and measured
Inflation expectations (Treasury vs SARB) and inflation target
Government should purchase only vehicles manufactured in South Africa
Tax increases
SACU transfer payments

19. Inflation Expectations
Discrepancy between forecasts of Treasury and the SA Reserve Bank
2015
2016
2017
2018
National Treasury
4.6
6.8
6.3
5.9
SA Reserve Bank (MPC)
7.0
6.2 (2017Q4)
Source: SA Reserve Bank, MPC statement 28 Jan 2016; 2016 Budget Review Chapter 2: 17

20. Inflation Target
Inflation target is 3 per cent to 6 per cent per annum.
Average inflation rate since 2002 is 5,8 per cent per annum.
Shows that inflation rate leans towards the upper end of the spectrum: With inflation at 5,8 per cent per annum, prices (on average) doubles every 12,4 years.
High inflation puts pressure on real growth, the budget, exchange rate, etc.
Targets of most other inflation-targeting countries are below that of South Africa.
It is problematic that the inflation forecasts of the National Treasury and the SA Reserve Bank differ

21. Government Vehicle Purchases
Government purchases vehicles to the value of some R7,5 billion annually:
R4 billion is spend annually on locally manufactured vehicles.
R3,5 billion is spend annually on imported vehicles.
Government should set an example to purchase “proudly South African” manufactured vehicles.
Local purchases of vehicles to the value of R3,5 billion can increase GDP by as much as R40 billion (assume 97,5 per cent marginal propensity to consume and ⅓ local content in vehicles manufactured in South Africa).

22. Tax Increases
Credit to National Treasury for using fiscal drag to increase Personal Income Tax (PIT)
Prefer expenditure cuts > fiscal drag > higher personal income tax > a wealth tax:
Much more acceptable/positive on sentiment;
New collection administration required for a wealth tax;
Affordability (e.g. low income but a very valuable property); and
Identifiable assets.

23. Tax Revenue
Budget speech mentioned proposed tax increases amounting to R18 billion (2016/17) and R15 billion in 2017/18 and 2018/19 respectively.
But from where is the question?
Propose two additional tax brackets, rather than a wealth tax, on condition that the government has no further room for savings:
45% on income between R1 million and R2 million;
50% on income above R2 million.
Politicians should not be excluded from these higher tax rates.

24. Tax Revenue Estimate from 2015 Tax Statistics (2014 figures as basis):
tax payers earn between R1 million and R2 million p.a.
tax payers earn between R2 million and R5 million p.a.
5 500 tax payers earn above R5 million p.a.
Average income (2014):
R (between R1 million and R2 million p.a.)
R (between R2 million and R5 million p.a.)
R (above R5 million p.a.)

25. Tax Revenue Additional income (2014 values):
R x x 0,04 = R1,8 billion (rounded)
R1 million x x 0,04 = R1,3 billion (rounded)
R x x 0,09 = R2,6 billion (rounded)
R1 million x x 0,04 = R0,2 billion (rounded)
R6,4 million x x 0,09 = R3,0 billion (rounded)
= Total extra tax: R8,8 billion (2014 values)
Adjust for 2016 values (6% inflation pa) = R10 billion (rounded)

26. SACU Agreement
SACU (Southern African Customs Union) comprises South Africa, Botswana, Namibia, Lesotho and Swaziland (BLNS countries).
South African GDP comprises more than 90 per cent of SACU GDP.
South Africa subsidises BLNS countries through SACU.
Transfers were/are:
2015/16 = R51 billion
(1,2% of GDP, international norm is 0,7% of GDP)
2016/17 = R37 billion
2017/18 = R45 billion
Subsidy agreement should be re-negotiated; South Africa’s own needs dictate that we can no longer afford this assistance to the BLNS.

27. Recommendations
Politicians should refrain from making populist statements with serious financial implications.
There is no room to increase the categories of beneficiaries, e.g. children over 18 or all people over 60, as was envisaged earlier.
Civil service trade unions should refrain from asking for large and unaffordable remuneration increases. Medium term budgeted figures for compensation of employees should be cast in stone!
South Africa cannot afford the civil service increases granted in 2015.
Moratorium on civil service employment is required (credit to Minister for curtailing personnel spending as mentioned in the budget speech).

28. Recommendations Discrepancy in inflation forecasts.
Reduce number of Cabinet ministers and deputy ministers.
Government should purchase vehicles made only in South Africa
Extra tax revenue:
Expenditure cuts are the primary recommendation and detail should be announced urgently
Fiscal drag prefered to income tax increases, which are preferable to wealth taxes
VAT increases are a regressive tax (impacts heavily on the poor)
South Africa can no longer afford the SACU agreement.

29. Questions/Discussion
Selected bibliography:
2015 National Budget Review National Treasury: Pretoria
2016 Budget
Anvari, V, Ehlers, N & Steinbach, R A semi-structural approach to estimate South Africa’s potential output. South African Reserve Bank Working Paper Series WP/14/08. November.SA Reserve Bank: Pretoria.
IMF South Africa: Staff report for the 2014 Article IV consultation. 17 November
Joubert, S. J. & Rossouw, J Lewensstandaard: ’n Ekonomiese perspektief op lewensgehalte in Suid-Afrika. Tydskrif vir Geesteswetenskappe. Jaargang 53:1. Maart
Rapport Mei
Republic of South Africa Budget Review National Treasury: Pretoria
Republic of South Africa Budget Review National Treasury: Pretoria
Republic of South Africa Budget Review National Treasury: Pretoria
Republic of South Africa Estimates of National Expenditure February. Republic of South Africa. National Treasury: Pretoria
Rossouw, J., Joubert, S. J. & Breytenbach, A Suid-Afrika se fiskale afgrond: ’n Blik op die aanwending van owerheidshulpbronne. Tydskrif vir Geesteswetenskappe, Jaargang 54 No. 1: Maart.
SA Reserve Service Tax Statistics
SA Reserve Bank: Various publications