By Prof. Busisiwe Mavuso
• The budget process has been difficult because of very mediocre economic growth. If we want to achieve sustainable public spending, we need growth that generates government revenue.
• National Treasury has worked hard to turn around the crisis that government finances were in five years ago, so it is vitally important that the budget does not increase debt levels.
• The only way forward is to reduce expenditure to within our means, which is always politically difficult – it means there will be losers.
• There is much we can do to improve growth, and one of our greatest strengths is the relationship between business and government. I am looking forward to the next meeting between organised business and the president, due to take place this Friday.
In the next two weeks, we will get our third budget this year. To state the obvious – it is very important for the country that we get a budget that enables growth. The reason this budget process has been so difficult is because of very mediocre economic growth. If we want to achieve sustainable public spending, we need growth that generates government revenue sustainably.
As it stands, our politicians must make difficult choices, made more difficult because of numerous factors, including the trade wars that have struck the world since February when the outlook was better. Now our economic growth expectations have been dampened. This means that there will be less tax revenue available to government as businesses are going to be less profitable and consumers more subdued in spending. The situation we must budget for is now worse than it was two months ago.
As I’ve said in this letter before, if we don’t want to compound the bleak economic outlook, it is vitally important that the budget does not increase debt levels. National Treasury has worked hard to turn 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. Doing that will result in a lower cost of debt for 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 government’s debt, consuming more of our tax money and damaging economic growth.
That means we have only two real choices – to increase taxes so that government raises more revenue to pay its bills, or to decrease expenses. Politically, the initial proposal by National Treasury to increase VAT to raise more revenue has been roundly rejected. The choices are then to find other taxes to implement or expenses to cut.
The difficulty for Treasury is that there really 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. So, when they go up more, people and companies simply shift economic activity out of the country.
Treasury’s research has shown that we may end up collecting even less tax as a result, because businesses move to outside of our borders, costing jobs. There has been some suggestion that Sars should be pushed to collect more taxes through efficiency and collection improvements. While it should aim to do this, it is not a prudent way to budget. Those of us in business know that it is easy to budget to spend money, but much harder to budget to make money. Budgeting must be prudent, and relying on excess tax collections is not.
So really the only way forward is to reduce expenditure to within our means. That is always politically difficult – it means there will be losers. Understandably, no politician wants to be the one to say that something can no longer be done by the government. But every year 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. When it comes to cutting expenses, we need a mature and honest assessment of what parts of government are delivering value to taxpayers, and the political bravery to make the necessary decisions when they are not. While it is good that our budget is subject to democratic interrogation, the government of national unity, as well as others in parliament, must show they have the political bravery to make decisions that won’t please everyone.
Of course, there is much else we can do to improve growth, and one of our greatest strengths is the collaborative relationship between business and government. I am looking forward to the next meeting between organised business and the president, due to take place this Friday. We last met in January, in a very positive meeting that aligned us on structural reforms we needed to pursue. Much progress has been made on those, from improving the electricity system to logistics reforms, but the world has changed. That was before the US election and tariffs. At that meeting, we set a goal of delivering a 3% growth rate by the end of this year. As a result of global conditions, despite the progress made, that will now be difficult to achieve. But that is no reason to slow down – just the opposite. We must redouble our efforts to drive reforms to improve the performance of our economy and global conditions have just made the task more urgent. We must think carefully about how opportunities have shifted and ensure our partnership and plans are geared for the world as it now is.
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. 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.
