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Matthew Lester: Prepare for a ‘bloodbath’ in February after Gigaba’s mini budget

Matthew Lester

JOHANNESBURG — The biggest day in Malusi Gigaba’s political career so far was strongly contrasted yesterday by a vehemently negative market reaction. While being honest in his assessment of the state of the South African economy, the Finance Minister provided little hope that he has a plan to halt the bleeding. And as Matthew Lester points out below, if Gigaba remains Finance Minister until the main budget in February, it could be a total ‘bloodbath’ for the country’s economy. – Gareth van Zyl

By Matthew Lester*

‘The choice we face in considering these proposals is a difficult one. But we believe that this course can no longer be postponed’

No, the above are not the words of Finance Minister Malusi Gigaba starting off his 2017 medium-term budget framework speech (MTBPS). But they are the words of Finance Minister Nhlanhla Nene on 22 October 2014.

Three years have passed since Nene announced that South Africa’s debt trajectory is not sustainable. A lot has happened, particularly in politics. But we are no closer to solving the problem. And today there can be no question that if it carries on like this, the simple conclusion must be that ‘SA cannot repay its debts = Junk’.

Malusi Gigaba’s budget statement. More of Zapiro’s magic available at www.zapiro.com.

Back in the 2014 MTBPS, Nene changed the game plan by establishing a three year target of increasing the tax base by R15bn pa and reducing state expenditure by R15bn pa. Zuma and his cabinet didn’t like him for that (and other things) so he was dumped in December 2014 in favour of Van Rooyen who lasted but one weekend before Pravin Gordhan was recalled.

SA’s debt trajectory did show some improvement during the period March 2015 to September 2016. In Pravin Gordhan’s final MTBPS, October 2016, the downward adjustment of the 2016/17 budgeted to tax collection was R10 billion.

But then the pawpaw hit the fan at the 2017/18 budget speech. Pravin Gordhan downgraded South Africa’s tax collection forecast for the 2016/17 year by go a further R27 billion. So that left SA R37bn down in total for the 2016/17 fiscal year. In previous years, SARS has usually been able to come home within R10bn of the original target.

The basic problem is that South Africa has never come anywhere close to achieving the target set by Nene three years ago. There is much work to be done. But the only ‘progress’ made was to fire Gordhan on 31 March and appoint Gigaba. Then in April 2017, Gigaba announced that SARS achieved its budgeted tax collection number.  Well, that depends on how you look at it. SARS achieved the downgraded target set by Gordhan in the February 2017 budget, just one month previously.  So the full R37 billion shortfall for 2016/17 was effectively ignored.

The tax collection budget for 2017/18, established in February 2017, does nothing to recover the shortfall from 2016.

Now in Gigaba’s MTBPS 2017 he announces that the tax collection estimate for 2017/18 will come in R50 billion short. So, over two fiscal years, SA could miss targets by close on R100bn.

Some may still say that R50bn, in the context of a total target of R1,265 trillion, is not that bad in these hard times.

But just look at the national debt trajectory! One must conclude that the final downgrades of South Africa’s domestic debt are now almost inevitable.

The revised overall budget shortfall for 2017/18 now sits at 4,3%. The national treasury objective contained in the Budget review back in February was to get this number below 3%.

The deterioration in the numbers in just over six months should be enough to put South Africa’s Financial community on drugs and booze!

Gigaba is probably right. The MTBPS is not the time to speculate on the tax increases that will be needed in 2018/19. So all we have really learned from MTBPs 2017 is that Budget day, February 2018, is going to be a bloodbath!

For me, the saddest part to the story is that there was ample talent sitting in Parliament on MTBPS day to solve South Africa’s problems. But they are not being used!

Finding an extra R50bn pa is not impossible and can be done with the cooperation of all South Africans. It cannot be done with a continued assault on personal tax and wealth taxes. It won’t even come close.

The MTBPS 2017 speech would have achieved far more if served up as the SONA address. It is clear that Gigaba has aspirations to lead South Africa one day. Maybe MTBPS 2017 was his first dress rehearsal.

  • Matthew Lester is an associate professor at the Rhodes Business School and a member of the Davis Tax Committee.
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