21 February 2017

South Africa: PBO Presents Macroeconomic Update in Pre-Budget Briefing

Photo: South African Govt
Finance Minister Pravin Gordhan (file photo).
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The Parliamentary Budget Office (PBO) appeared before the Joint Meeting of the Standing and Select Committee on Appropriations, and the Standing and Select Committees on Finance to present its pre-budget briefing to provide them with an update on the country's macroeconomic situation. This informs its fiscal policy framework.

In this briefing, which happened on the eve of the Finance Minister's Budget Speech, Members were told that in this financial year the Treasury has a shortfall of over R28 billion. There is also R15 billion that needs to be injected into the fiscus to fund developmental priorities, said the Director of PBO, Prof Mohammed Jahed.

The PBO also reflected on the appropriateness and adequacy of the government's fiscal policy stance given the country's current growth and development priorities. Prof Jahad listed an assortment of tax possibilities for consideration. "The additional revenue of R28 billion required in 2017/18 financial year can be derived from personal income tax, value-added tax (VAT), corporate tax, the fuel levy, the sin tax, wealth tax and others taxes such as a skills levy, and a sugar and carbon tax."

Of all tax components, VAT has been singled out as both the most effective and regressive component of revenue-raising mechanisms. "We cannot look at the possibility of Value-Added Tax (VAT) increase in isolation given its socio-economic impact," said PBO Deputy Director Mr Dumisani Jantjies.

"Our system is protective of the low-income household by exempting tax from certain goods. The zero-rated basket can cushion the impact of a VAT increase. But the question is: is the current zero-rated mechanism effect to cushion the poor? If we raise VAT by 1% you are likely to raise R10 billion that will be revenue for government. But that will have 0, 5% effect on inflation," Mr Jantjies explained.

"Our study has shown that there are pros and cos in the increment of VAT," he added. "It is easy to raise VAT, but the problem is that even those who are in high-earning brackets benefit from the zero rated items. And that in a way defeat the purpose of our zero-rated mechanism.

"As such, the burden of VAT is mostly felt by low-income house-holds. There is a sense that there is a need to explore other mechanism to cushion the poor from any possible VAT increase because the current mechanism is not as effective as it was meant to be," Mr Jantjies continued.

Committee Member Mr David Maynier asked if the PBO expected an increase in VAT and if this move would be harmful to the economy. Mr Jantjies replied: "It seems that VAT is regressive. However, VAT will increase at some point given that we currently need R28 billion and R15 billion later on."

Another Committee Member, Ms Thandi Tobias, asked what stimulatory role policy could play.

Prof Jahed replied: "Since 1994 we have been on the same policy trajectory, yet we have not seen growth, or unemployment and poverty reduction. We keep on following it, even if is not assisting."

"Currently, we have no clear stimulatory fiscal policy, said another PBO Deputy Director, Mr Seeraj Mohamed. "For instance, we have not used tax relief as a stimulatory mechanism when we experienced growth. We stick to the plans we have, irrespective of a need for change in our fiscal objectives."

A member of the Committee, Mr Malcolm Figg, asked if we could consider increasing corporate income. The PBO Finance Analyst, Mr Brandon Ellse, said corporate tax needs to be looked at holistically. "Given where we are with unemployment, it seems unlikely that there would be corporate tax increases."

Committee Member Mr Floyd Shivambu said South Africa is not collecting taxes as it should. "It is problematic to have 60% of our taxes being shouldered through personal income tax when there are informal sectors that don't pay taxes."

The Chairperson of the Select Committee on Finance, Mr Yunus Carrim, asked what needs to be done to fix fiscal policy. Prof Jahed replied: "We have been focussing on unemployment and poverty, but our economic structure has remained the same. If, for instance, we say let us change the structure of the economy, let us see it in the budget. If we want to eradicate poverty that commitment must be mirrored in our budget.

"Our policy imperatives must be reflected in our budget. For instance, in a country where 36% of our population is unemployed, VAT will have a great impact on the poor. We don't need a study on that, it is a common sense," said Prof Jahed.

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