Transcript Budget 2017: An assessment, with emphasis on the

Budget 2017: An assessment, with emphasis on the
fiscal framework and revenue proposals
Mr Jugal Mahabir and Dr Seán Muller, Public and Environmental Economics
Research Centre (PEERC), University of Johannesburg
1st March 2017
Critical questions for the Finance Committees
Specific requirements of Money Bills Act (2009): fiscal framework
Overall framework
an appropriate balance between
expenditure and borrowing
revenue,
adequate provision for spending on infrastructure
development, overall capital spending and
maintenance
take into account all public revenue and
expenditure, including extrabudgetary funds, and
contingent liabilities
Debt
debt levels and interest costs are reasonable
cost of recurrent spending is not deferred to future
generations
Economic context and impact
take into account cyclical factors that may impact
on the prevailing fiscal position
consider short, medium and long term implications
of the fiscal framework, division of revenue and
national budget on the long-term growth potential
of the economy and the development of the
country
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Specific requirements of Money Bills Act (2009): revenue Bills
REVENUE BILLS
 ensure that the total amount of revenue raised is
consistent with the approved fiscal framework and
the Division of Revenue Bill
 take into account the principles of equity, efficiency,
certainty and ease of collection
 consider the impact of the proposed change on the
composition of tax revenue with reference to the
balance between direct and indirect taxes
 consider regional and international tax trends
 consider the impact on development, investment,
employment and economic growth
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We selectively address these as follows
FISCAL FRAMEWORK
• Is fiscal consolidation appropriate in the current
context?
•
Should debt rise further so that expenditure can
increase more rapidly than planned?
REVENUE PROPOSALS
• Are the revenue proposals equitable?
• Are criticisms of the new top tax bracket accurate?
• The composition of tax revenue is a concern, but
are solutions as obvious as some claim?
• Where does the responsibility lie for the revenue
shortfall?
• Are we taking from the productive to the
unproductive?
• Are contingent liabilities under control and not
posing undue risk to the fiscus?
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Summary of presentation
• Support the gist of 2017 Budget, given circumstances
• Support government’s stance of fiscal consolidation in current context
― Despite consolidation, upward trend in debt
• An urgent need to reprioritize budget to ensure transformation and goals of the NDP
― Real austerity measures may become a reality?
• Tax proposals are defensible but a major concern over tax buoyancy
― Support progressive tax structure and new tax bracket
― Further tax increases inevitable over medium term if economic growth does not improve
― Concerns over the road accident fund
• Contingent liabilities remain a serious concern
• Budget aims for transformation within its constraints
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Brief reflection on forecasts underpinning Budget 2017
Brief thoughts on the growth and revenue forecasts
• Improved growth forecasts over the medium term
driven by:
― Increasing commodity prices
― Improved labour relations
― Electricity supply has stabilized
― Real exchange rate depreciation
― Drought has eased
• Growth prospects are improving
• SA economy still vulnerable to unforeseen shocks
• Domestic policy uncertainty
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Serious concern: falling GDP per capita
Growth rate of GDP/capita
5.00%
4.00%
3.00%
2.00%
1.00%
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Why fiscal consolidation makes sense
Pushing on a string: why fiscal consolidation makes sense
• Criticism of Treasury for compromising ‘radical
economic transformation’ through fiscal
consolidation is misguided
Economic
activity
• ‘Pushing on a string’ describes ineffective
attempts at expansionary monetary policy
Economic
activity
• Same idea can be applied to fiscal policy
• The cost is significant: rising debt (and less
fiscal space) without any substantial benefits
• Right question: why is government expenditure not
having the desired effect?
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Are we on a path of consolidation?
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Why is our Fiscal Policy not working ?
• Inefficiency
• Ineffectiveness
• Corruption
• Supply-side issues
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Should we allow debt levels to rise further?
• Despite efforts by economists, there’s no
magical, correct debt threshold (in general, or
for any country)
• Nevertheless, well established that:
1. As Debt/GDP rises probability of default
rises (all else equal)
2. Typically a negative relationship between
debt levels and credit ratings
3. Cost of borrowing increases with lower credit
rating
4. Negative relationship between ‘high’ debt
levels and long-run economic growth
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Reduction in expenditure ceilings and public sector posts
Need to get past ideological rhetoric on public wage bill
• Too many ideologues and platitudes - need for nuance
1. Public sector wages are not inherently wasteful: public servants are fundamental to
service delivery in all areas (social and economic)
2. But delivery failures suggest a significant proportion of civil servants either not
competent or not exerting adequate effort
3. Significant under-resourcing in ‘frontline’ posts (teachers, nurses, police officers, social
workers, etc)
4. Large growth in bureaucracies (including new ministries) with unclear mandates but
highly-paid staff
5. Wage agreements not reflective of fiscal environment
Our conclusion: change the shape of the public service. Remove superfluous managers
and fund frontline posts, which can increase number of jobs.
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Critical posts: more information needed
• Government aims to prioritize the
filling of critical posts
• More information is needed as to
whether this has been a success
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Revenue shortfall and proposals for 2017/18
Where does responsibility lie for the revenue shortfall?
• A R30bil shortfall is estimated/forecast for 2016/17
• Minister appears to be correct that this is largest shortfall
in Rand terms outside of 2008 Financial Crisis
• What are the reasons for this? Standard
considerations:
Buoyancy
Nominal GDP growth
1.6
18%
16%
14%
1.0
12%
• Growth lower than forecast
• Lower wage increases -> lower PIT
10%
0.4
8%
• Reduced imports -> lower import VAT
2%
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
2015/16
2013/14
2011/12
2009/10
2007/08
2005/06
2003/04
0%
2001/02
-0.8
1999/00
• Could explain shortfall in general VAT in 2016/17
4%
1997/98
• Concerns that VAT refunds were delayed in 2015/16 to
‘claim success’ from inflated revenue collection figures
-0.2
1995/96
• However, dramatic change in tax buoyancy is
anomalous: from 1.47 to 0.86
6%
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Brief thoughts on the revenue proposals
Tobacco
2%
Alcohol
5%
Fuel levy
11%
• The fuel levy is in some sense a consumption tax by
Fiscal drag
43%
stealth
• Albeit that incidence may not be as regressive as PBO
implied in prior year, because failed to adequately
consider fuel consumption by car owners
• Strong signals of likely VAT increase in 2018 Budget:
needs to be approached with nuance
• The Road Accident Fund liability is very concerning;
Budget Review forecasts rapid growth despite the
proposed increase in the levy
• Does raise question as to whether finance committees
should be playing more active role in Amendment Bill
• Prudent not to reflect sugar tax revenue
Dividend
withholding
24%
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
Top tax
bracket
15%
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Misplaced arguments against the new top tax bracket
• Argument that many high net-worth individuals will
emigrate as result... [Intellidex survey]
• Appears implausible given marginal effect
• Argument that top bracket primarily affects black
South Africans and doesn’t account for ‘black tax’
60%
GDP growth
PIT
Net debt-to-GDP
7.00%
6.00%
50%
5.00%
40%
4.00%
3.00%
• No evidence of this and household income data suggests
otherwise
• Critical to have a sense of perspective: historical
rates show that we are not in uncharted territory
• Nevertheless: taxpayer compliance should not be
taken for granted
30%
2.00%
20%
1.00%
0.00%
10%
-1.00%
0%
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
-2.00%
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Contingent liabilities
Contingent liabilities remain a serious concern
• Despite some assertions to the contrary by Eskom management, Eskom is heavily
reliant on government guarantees (and received massive cash injection and
balance sheet support in 2015 via Special Appropriation Bills)
• Projected exposure over MTEF seems to be R50bil higher than in Budget 2016
• Many threats: further escalation in Medupi & Kusile costs, unnecessary/premature
procurement of nuclear, falling electricity demand, rising borrowing costs, etc
• The ‘forecast’ for REIPP contingent liabilities may warrant further examination
• Revised downwards since Budget 2016 and now forecast to fall rather than rise...
• RAF contingent liability seems to be R55bil more for 2018/19 than 2016 Budget
• Other SOEs remain a concern: SAA, new governance issues at ACSA
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Radical economic transformation & Budget 2017
Radical economic transformation critique of Budget 2017 is misguided
• Critics of the Finance Minister in this regard appear not to understand government’s policy process
― They also complain that National Treasury has too much power but then assert that the Budget must provide radical
economic transformation details without these being reflected in the Medium-Term Strategic Framework (MTSF) or State
of the Nation Address
• Absent further guidance from Cabinet, only appropriate test is of Budget against the MTSF
― MTSF (2014-2019) has ‘radical economic transformation’ and ‘improving service delivery’ as its two main themes
― The ‘14 priority outcomes’ often referred to are supposed to fall within these two themes
“Achievement of economic transformation and inclusive growth will not result from a single intervention, but
from a range of mutually supporting initiatives. In many cases, this does not require new strategies, but better
implementation of existing ones.” (MTSF 2014-2019)
• In the limited time available, we have compiled a quick checklist. From this it appears that Budget 2017 is
consistent with the MTSF (2014-2019) conceptualisation of radical economic transformation:
Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Budget 2017 alignment to radical economic transformation in MTSF
MTSF requirements
‘Main pillars’
Is Budget 2017 aligned?
Yes
1
Productive investment crowded in through infrastructure build
programme

2
Competitiveness enhancement in productive sectors of the economy

3
Addressing spatial imbalances in economic opportunities

4
Elimination of unnecessary regulatory burdens
5
Workers’ education and skills development to meet economic needs

6
Macroeconomic and financial framework to support employmentcreating growth

7
Workplace conflict reduction and improved cooperation between
government, organised business and organised labour
8
Expanded opportunities for historically excluded and vulnerable
groups, small businesses and cooperatives

9
Public employment schemes

No
N/A


Public and Environmental Economics Research Centre (PEERC): Budget 2017 – Presentation to the Standing and Select Committees on Finance
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Summary
• Fiscal consolidation is warranted and prudent in the context of slow growth and
rapid increase in debt since 2008
• Composition of expenditure may be more fruitful area to focus, including detailed
understanding of the composition of effects on public sector posts
• Revenue proposals strike a difficult balance
top tax bracket defensible
more evidence on distributional effects desirable
some concerning indicators regarding revenue collection
• Changes in IPPs (decrease), RAF and Eskom (increase) contingent liabilities
deserve more attention and explanation
• Brief assessment suggests Budget 2017 is consistent with radical economic
transformation as defined in the MTSF (2014-2019)
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THANK YOU
Evidence available on distributional effect of indirect taxes
• Work on ‘fiscal incidence’ by Inchauste, Lustig,
Maboshe, Purfield and Woolard (2015):
 VAT with zero-rating is slightly ‘progressive’
 Excise taxes are ‘regressive’
 Fuel levy is slightly ‘progressive’
 Similarly, in 2009 a paper by the FFC (Mabugu,
Chitiga, Amusa) found fuel levy to be ‘progressive’
 These are estimates, but not aware of contradictory
evidence – so should recognise current empirical
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