2019 MTBPS highlights the urgency of reducing government spending.

The Minister of Finance, Tito Mboweni’s speech during the 2019 Medium-Term Budget Policy Statement (MTBPS), on Wednesday 30 October, was a strong warning that South Africa may not be able to recover if government does not act immediately.

This is according to David French, Tax Consulting Director at Mazars, who says that the Minister’s message about the state of the fiscus was fairly direct.

“He was very clear that the country is in trouble, mentioning that Treasury needs to get more money from somewhere. This will have to come from either raising taxes or raising the national debt. However, neither of these options is an acceptable solution.”

As French points out, there is not much room for increasing any of the major tax classes. “There is widespread agreement that we are at the top of the Laffer curve, and that any further increases in personal or corporate income taxes are likely to only lead to tax collections shrinking further.”

According to French, increasing the national debt is an even more dangerous option. “As the Minister pointed out, we are on the verge of an inescapable debt trap. At the current rate, the prediction is that South Africa’s gross national debt will climb to 71% of GDP by 2022. The only real solution is to commit to some drastic cutbacks in government spending – which is already R23 billion higher than Treasury’s projections at the start of this financial year.”

French notes, however, that this is much easier said than done. “The Minister’s suggestions included measures such as freezing of salaries for parliamentarians, a review of subsistence allowances for government employees, and putting caps on how much government employees are allowed to spend on items such as cars. However, I do not believe that government is going to enforce those measures.”

Lastly, French states that the Minister’s stance on the controversial issue of the Gauteng Freeway Improvement Project and the payment of e-tolls, is oversimplified. “We can all agree with the principle that freeway users are responsible for paying tolls.

At the same time, he points to the fact that bailouts for state-owned entities (SOEs) have already cost the country over R36 billion. “Eskom alone accounts for around R26 billion in spending. The problem is that we cannot operate without it, so Eskom is probably going to continue to be a drain on the fiscus for some years to come. The Minister’s proposal to only provide money to SOEs in the form of loans going forward, is also rather pointless. Government will probably be forced to write off those debts in ten years’ time anyway, when these SOEs are unable to repay them.”

However, the real problem is that those funds currently go directly to Sanral – an organisation with almost no transparency, and which is possibly diverting a lot of the money that it collects offshore. The correct way to do this would be to have SARS collect e-tolls and allocate these funds to the departments that actually require it.”

On the matter of VAT, Tertius Troost, Tax Manager at Mazars weighs in.

“Treasury made a good decision to raise the VAT rate in 2018, and the effect that this had on revenue collections was positive. However, I believe that government should have been more decisive.”

He argues that if government had introduced a 2% VAT increase the revenue gap could have been avoided altogether. “In theory, increasing VAT by 2% instead of the 1% that we saw in April of 2018, would have been enough to help Treasury reach the R1.42 trillion target. Even though very unpopular and will lead to a backlash, no alternatives remain, but to increase VAT again.”

On a more positive note for French, the Minister’s comments regarding the Reserve Bank were quite heartening. “Minister Mboweni indicated to the advocates of nationalisation that the Reserve Bank was functioning well enough on its own, and was actually profitable – the state would therefore do well to leave it alone,” he concludes.

The above press release was featured in various media and includes comments from Mazars experts David French (Director) and Tertius Troost (Manager- currently on Secondment to Mazars UK).