Transcript South Africa`s fiscal position

SOUTH AFRICA’S FISCAL POSITION
PRESENTATION AT THE CAPE TOWN PRESS CLUB
24 February 2015
Jannie Rossouw
Head: School of Economic and Business Sciences
University of the Witwatersrand
1
OVERVIEW
• Historical background and unanswered questions
• This presentation analyses:
• the fiscal cliff facing South Africa (x2)
• social assistance expenditure
• the remuneration of civil servants
• a proposal to raise government’s revenue by R44 billion, the
additional income requirement to 2018
• This presentation expands the findings Rossouw, Joubert and
Breytenbach (2014) on the possible fiscal cliff facing South
Africa
2
HISTORICAL BACKGROUND AND
UNANSWERED QUESTIONS
• The budget is traditionally presented on Wednesday afternoon –
reason?
• Government’s fiscal year runs from 1 April to 31 March annually
• The financial year of South African municipalities runs from 1 July
to 30 June annually, although many poor municipalities are
dependent on funding transfers from national government
• Tax year for individuals run from 1 March to 28/9 February annually
since 1964 (previously 1 July to 30 June)
3
INTRODUCTORY SUMMARY
• This research defines South Africa’s fiscal cliff as the point where
civil service remuneration plus social grant expenditure equal
government revenue
• By 2012 it was clear that the South Africa was heading for a fiscal
cliff with social assistance expenditure and the remuneration of
civil servants exceeding all government revenue by 2026 if historic
growth trends continued
• Based on trends between 2008 and 2012, not even tax increases to
raise revenue could have averted the problem
4
2012 ASSESSMENT: HOW BIG IS THE PROBLEM?
3500
3000
R billion
2500
2000
1500
1000
500
2028*
2027*
2026*
2025*
2024*
2023*
2022*
2021*
2020*
2019*
2018*
2017*
2016*
2015*
2014*
2013*
2012
2011
2010
2009
2008
0
Figure: Social assistance and compensation to government revenue
*Estimates
Sources:
Estimates of National Expenditure 2012:421-522 as used in Joubert and Rossouw 2013,
Breytenbach and Rossouw 2013, SA Reserwebank, Statistics SA [S.a.], own calculationsF
SOCIAL GRANTS: SUBSEQUENT
DEVELOPMENTS
It seems that growth rate in this expenditure item is levelling out, but it still requires
careful monitoring:
• Trends are concerning and confusing (e.g. an expected decline in child support grants
after 2020 vs talks of increasing qualifying age to 23?)
• Number of grant recipients expected to increase from 16 052 000 (2014/15) to 17 300
000 (2017/18). This is equal to an average growth rate of 2,5% p.a., which shows
continued uptake of social grants
• Social grant expenditure expected to rise from R120,9 bn (2014/15) to R129,5 bn
(2015/16) and R137,6 bn (2016/17). This is equal to an average growth rate of 7,4% p.a.
6
SOCIAL ASSISTANCE: COST AND
NUMBER OF RECIPIENTS LEVELING
OUT
R bn
Million
17
140
120
16
100
15
80
14
60
13
40
12
20
11
0
10
2008
2009
2010
2011
Cost
2012
2013
2014
2015
Number (rh)
7
Source:
2014 Budget Review
GRANTS
8
Source:
2014 Budget Review: 44
COMPENSATION ACCOUNT OF THE SOUTH AFRICAN GOVERNMENT
• The number of employees in the public sector (central plus provincial government)
increased at a steady rate of some 2,6% per annum between 2008 and 2014
• Employment growth in the civil service levelled off in 2014 – a very positive
development
• Average annual adjustment (general increase) between 2008 and 2014 was 6,9%
(inflation plus 1 percentage point)
• Actual annual average increase in remuneration expenditure between 2008 and 2014
amounted to 13,1% per annum. Difference of 6,2 percentage points (reasons for
difference on the next slide)
• Government cannot afford to an annual increase in civil service remuneration of more
than one percentage point above the rate of inflation (and definitely not by 15%).
Based on the above it might result in an increase of 21,2% (15% + 6,2%)
9
COMPENSATION ACCOUNT OF THE SOUTH AFRICAN
GOVERNMENT
An analysis by Breytenbach and Rossouw (2013) shows that the increase in the
government’s compensation account since 2008 is attributable to:
Annual general adjustment (6,9%) accounted for by:
•
Inflation (5,9%); and
•
additional general annual increase (1%)
Balance of 6,2% (13,1% -- 6,9%) accounted for by:
•
structural changes in public service compensation, more senior staff
members appointed from outside owing to more government departments
and larger compensation increases for senior staff (2,6%);
•
notch increases and promotions (1%); and
•
growth in public service employment on national and provincial levels (2,6%)
Leveling-off in employment growth in itself is therefore not a sufficient
condition to avert a fiscal cliff
10
FISCAL FORECAST
• Engle-Granger type econometric model
• Long term (cointegrated) plus short term (error correction
mechanism, ECM)
• Macroeconomic, time series data 1990 to 2013 (24 observations)
• 2-Step model with money supply (M3) feeding into government
revenue (REV)
• Velocity of money dynamic:
• Variables including change in price level, disposable income and
interest rates (Gould & Nelson, 1974).
11
GOVERNMENT REVENUE FORECAST:
EXOGENOUS VARIABLES AND ASSUMPTIONS
Variable (name in model)
Assumption
Money supply (RM3)
Result as obtained from econometric model
Disposable income (RYD)
Expected nominal GDP (OECD GDP forecast* + 5,9%
inflation)
Prime interest rate (RPRIME)
Inflation plus 3.0 percentage points
Inflation (INFL)
Actual average SA inflation rate for 2002 to 2013
* For the forecast period this model uses 3% per annum real growth, i.e. South Africa’s fullemployment growth rate. However the MTBPS shows that this forecast is too high for 2014, 2015 and
2016 as Treasury expects this rate of growth on to be achieved only by 2017
12
FISCAL FORECAST
• The baseline analysis accepts that:
– the take-up rate in social grants will increase for the next decade
and then level out
– the increase in government remuneration will be limited to 10,5%
p.a. (6,9% general adjustment and 3,6% for “others”)
– the economic growth rate will be 3% per annum
• The latter is problematic, as South Africa currently suffers “investment
hesitation” owing to power supply problems and an uncertain policy
environment
• An additional scenario, the effect of a 15% increase in civil service
remuneration for 2015 to 2017, is also shown in the result below
13
RESULTS
R bn
60000
80.0%
70.0%
50000
60.0%
40000
50.0%
30000
40.0%
30.0%
20000
20.0%
10000
10.0%
0.0%
2008
2010
2012
2014*
2016*
2018*
2020*
2022*
2024*
2026*
2028*
2030*
2032*
2034*
2036*
2038*
2040*
2042*
2044*
2046*
2048*
2050*
2052*
2054*
2056*
2058*
2060*
0
Social assistance and remuneration
Government Revenue
Scenario given 15% p.a. increase in remuneration for 2015 to 2017: Percentage of Revenue (rh)
Baseline analysis: Percentage of Revenue (rh)
14
FISCAL CLIFF AVERTED?
• This analysis still shows a fiscal cliff approaching, but
further in the distance as in earlier research
• The size of Cabinet should be reduced with a concomitant
reduction in the number of government departments and
senior civil servants
• There is no scope for general annual civil service
remuneration increases exceeding the rate of inflation plus
1 percentage point
• Notch increases are a contractual obligation
15
FISCAL CLIFF AVERTED?
• Promotions should be limited
• Civil service employment numbers should be
contained with a moratorium on growth in civil
service employment
• Structural changes in remuneration with larger
increases for senior staff should be avoided
• Social grants cannot be increased to over more
recipients
16
GOVERNMENT’S REVENUE NEEDS
• The 2014 MTBPS reports that government requires spending
cuts of R25bn and additional revenue of R44 bn in the period
to 2017/18
• No firm proposals for cutting spending were tabled
• This implies new and additional taxes to raise revenue
• Opportunities for increasing revenue is very limited
17
GOVERNMENT REVENUE BY SOURCE
2014/15 – FISCAL YEAR
Tax Revenue (Income source)
Amount (R billion)
% of subtotal
Personal Income Tax
335,9
33,8
Value Added Tax
267,2
26,9
Corporate Income Tax
198,9
20,0
Excise Duties*
31,1
3,1
Fuel Levies
47,5
4,8
Customs Duties
50,3
5,1
Other** (e.g. Dividend tax, estate tax, gift tax, etc.)
62,7
6,3
Subtotal
993,7
100,0
Non-tax revenue
20,9
Less: SACU-payments
-51,7
Total
962,8
* Specific plus Ad valorem excise duties
Source:
2014 Budget Review: 132
** Balancing Item
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RAISING REVENUE
•
The three main sources of tax revenue are personal income tax, company tax and value-added tax (VAT),
which should therefore be the focus of a revenue-raising exercise
•
In the calculation of an increased tax burden a 10% elasticity in the reduction of the tax base owing to the
increased tax burden is assumed. Examples of reductions are people working less in response to higher
income tax, people driving less in response to increased fuel prices and people spending less in response
to increased VAT rates.
•
Proposals:
•
The introduction of two additional marginal tax brackets: 45% for taxable income above R1 million
per annum and 50% for taxable income above R2 million per annum
•
VAT increased by 1 percentage point from 14% to 15%
•
Company tax increased to 30%
•
Increase excise duties and fuel levy by 10%
•
Assume that other (e.g. dividend, estate and gift taxes) can be increased to yield an additional R1
billion per annum
•
Other:
•
SACU payments more than revenue from custom duties?
19
MARGINAL TAX RATE STRUCTURE WITH TWO PROPOSED
EXTRA BRACKETS (ASSESSMENT 2014/15)
Taxable Income (R)
Rate of Tax (R)
0 – 174 550
18% of taxable income
174 551 – 272 700
R31 419 + 25% of taxable income above R174 550
272 701 – 377 450
R55 957 + 30% of taxable income above R272 700
377 451 – 528 000
R87 382 + 35% of taxable income above R377 450
528 001 – 673 100
R140 074 + 38% of taxable income above R528 000
673 101 – 1 000 000
R195 212 + 40% of taxable income above R673 100
1 000 001 – 2 000 000
R325 972 + 45% of taxable income above R1000 000
2 000 001 and above
R775 972 + 50% of taxable income above R2 000 000
Tax Rebates
Primary
Secondary
Tertiary
R12 726
R7 110 (persons 65 and older)
R2 367 (persons 75 and older)
20
Source:
National Treasury, own calculations
ADJUSTED GOVERNMENT REVENUE BY REVENUE SOURCE
Revenue/income source
Amount
before
adjustment
(R billion)
Proposed
adjustments
Additional
Income
Reductions
(Elasticity
effects)
Revised
additional
income
Amount after
adjustment
and
reductions
(R billion)
7,5
-0,8
6,7
342,7
19,1
-1,9
17,2
284,4
198,9
Marginal rate
adjustments
Rate adjusted to
15%
Rate adjusted to
30%
14,2
-1,4
12,8
211,7
Excise duties*
31,1
10% extra
3,1
-0,3
2,8
33,9
Fuel levies
47,5
10% extra
4,8
-0,5
4,3
51,8
Customs duties
50,3
Paid over to SACU
0,0
0,0
0,0
50,3
Other** (e.g. Dividend tax,
estate tax, gift tax and non-tax
revenue)
62,7
Assumed additional
R1bn
1,0
-0,1
0,9
63,6
Subtotal
993,7
N/a
49,7
-5,0
44,7
1038,3
Non-tax revenue
20,9
N/a
N/a
N/a
N/a
20,9
SACU
-51,7
N/a
N/a
N/a
N/a
-51,7
Total
962,8
N/a
49,7
-5,0
44,7
1007,5
Personal income tax
335,9
Value-added tax (VAT)
267,2
Corporate income tax
*Specific plus Ad valorem excise duties.
**Balancing item
Source:
2014 Budget Review: 132, own calculations
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FINAL REMARKS AND CONCLUSIONS
• A fiscal cliff has not yet been averted but it is further in the distance than
indicated by earlier (2014) research
• There is no scope to grant annual civil service remuneration increases of
more than the rate of inflation plus 1 percentage point. An increase of 15%
can simply not be afforded as it will push South Africa over the fiscal cliff
• Moratorium must be placed on growth in civil service employment numbers,
promotions, larger increases for senior officials and new senior appointments
from outside
• Social grant expenditure must be contained
• The room for raising extra income through increased taxation is very limited
22
FINAL REMARKS AND CONCLUSIONS
• Limiting government expenditure is preferable to the raising of taxes
• Given South Africa’s own fiscal needs, it is clear that this subsidisation of
South Africa’s SACU partners can no longer be afforded
• South Africa suffers “investment hesitation” owing to power supply and
policy uncertainty, thus impacting negatively on the economic growth
rate. A lower growth rate will change these assumptions considerably as
it erodes growth in the tax base, with the fiscal cliff moving closer
23
QUESTIONS/DISCUSSION
Selected References:
•
Breytenbach, A. & Rossouw, J. 2013. ’n Ontleding van vergoedingsneigings in die Suid-Afrikaanse
staatsdiens, 2005 tot 2012. Tydskrif vir Geesteswetenskappe. Jaargang 53:4. Desember.
•
Business Day. 2014. “Gauteng education MEC moots exemption of teachers from income tax”.
Available on: http://www.salabournews.co.za/index.php/component/content/article/70-labournews/18780-gauteng-education-mec-moots-exemption-of-teachers-from-income-tax.html.
[Downloaded on: 14 July 2014]
•
Joubert, S. J. & Rossouw, J. 2013. Lewensstandaard: ’n Ekonomiese perspektief op lewensgehalte
in Suid-Afrika. Tydskrif vir Geesteswetenskappe. Jaargang 53:1. Maart.
•
Rapport. 2014. 11 Mei
•
Republic of South Africa. 2014. Budget Review 2014. National Treasury: Pretoria
•
Republic of South Africa. 2014. Estimates of National Expenditure 2014. 26 February. Republic of
South Africa. National Treasury: Pretoria
•
Republic of South Africa. 2013. 2013 Budget Speech. Minister of Finance (Mr Pravin Gordhan). 27
February 2013
•
Rossouw, J., Joubert, S. J. & Breytenbach, A. 2014. Suid-Afrika se fiskale afgrond: '’n Blik op die
aanwending van owerheidshulpbronne. Tydskrif vir Geesteswetenskappe, Jaargang 54 No. 1:
Maart.
•
SA Reserve Bank: Various sources
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