Big storm brewing over Treasury’s budget cuts
Some of South Africa’s biggest trade unions have called for strikes over the proposed budget cuts by the National Treasury to be announced in the Medium-Term Budget Policy Statement (MTBPS), which unions say would be detrimental to workers and the poor.
The City Press reported that Saftu and Cosatu heads called on all unions, workers, and the public of South Africa to stand against any budgetary cuts which are a result of an incompetent government.
“The finances of government would not be in a precarious position if it had invested in infrastructure.
“The problem is that the government itself is on an investment strike, and it’s allowed the private sector to be on an investment strike. We’re now sitting at around an investment of only 14% of GDP. The economy can’t grow this way,” said Saftu general secretary Zwelinzima Vavi.
Cosatu president Zingiswa Losi added budget cuts would not help resolve the economic crisis in the country. The labour federation rejected “reckless attempts to impose misguided austerity budget cuts” across government, reported City Press.
These remarks come after the minister of public finance, Enoch Godongwana, drafted a document that called for cuts of up to 15% of department spending and:
- Freezing the hiring of new employees, except where an offer of employment has already been made or approved by the National Treasury and the Department of Public Administration and Services (DPSA).
- Freezing the advertisement of the procurement of all infrastructure projects unless approved by the Treasury.
- Reduce non-essential travel unless funded by non-government resources.
- Freeze spending on catering, workshops and conferences, and other related goods and services that have not been contracted.
- Ensure that the recommendation of spending reviews is fully implemented by 31 March 2024 unless otherwise agreed with the Treasury.
South Africa’s fiscal deficit for 2023 is set to be far higher than the 4% Finance Minister Enoch Godongwana predicted, with it set to be between 6% and 6.5% of GDP.
RMB Chief Economist and Head of Research Isaah Mhlanga noted after the proposals that the National Treasury is likely to experience significant political resistance to its spending cuts, which has started brewing in light of the unions’ latest statements.
The government is in a tight spot
Several economists have warned that the government will face serious backlash for slashing spending, especially considering the national elections in 2024.
These concerns have seemingly been affirmed by President Cyril Ramaphosa, who said in response to the drafted document that a cut in spending is “not necessarily” the answer to the country’s financial problems, despite the decline in revenue.
However, it seems to be the only option. According to economists, the avenues available to address the country’s debt crisis are through high economic growth, inflation, drastic curtailing of government spending, or increasing taxes.
Seasoned economist Dawie Roodt said that high growth is very unlikely, given the country is only expected to grow by 0.3% this year. He added that inflation is probable but could not rise to a level that could make a significant difference to the government’s predicament.
Therefore, without drastic curtailing of government spending, the only option is increasing taxes – which Roodt said would be a big mistake.
Only 1.12% of taxpayers (roughly 163,702 South Africans) pay 30% of total personal income taxes in the country, while 19% pay a whopping 87% of total personal income taxes.
Additionally, a staggering 0.09% of corporate taxpayers (only 770 companies) pay 62.5% of total CIT, with 4.4% paying 95% of total corporate income taxes.
“This means the country has an alarmingly narrow tax base, which is a massive concern for the state’s finances. You cannot increase this.
“If this increases, the tax base will collapse as many of the 1.12%, as well as businesses, will simply leave the country – which they are already doing,” said Roodt.
Despite this, speaking at News24’s 2023 On The Record Summit, Godongwana said there would be a need for a combination of these instruments – borrowing, tax increases, and cuts in spending – to help the country out of the debt trap it finds itself in.
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