There is no new money
SA cannot cave in to populist demands to meet all its financial commitments if it is
ven draconian tax hikes will not be able to save SA from going over the looming fiscal cliff if recent expenditure trends continue unchecked.
This was the blunt warning made in a presentation to a joint sitting of the select and standing committees of finance in parliament last week by Prof Jannie Rossouw, who heads the school of economic & business sciences at Wits University.
Rossouw and Unisa researchers Fanie Joubert and Adèle Breytenbach estimate that free tertiary education for all would add an extra R33bn a year to government expenditure.
Even if government responded by instituting two new personal income tax brackets, including hiking the 41% marginal tax rate to 45% on income over R1m/year and taxing earnings over R2m/year at 50%, they estimate it would yield only R6,82bn a year more in tax revenue — a drop in the ocean compared with the amount required.
The presentation built on a previous paper by Rossouw, Joubert and Breytenbach, “SA’s fiscal cliff: A reflection on the appropriation of government resources”, published in SA’s Journal of Humanities last year.
Their definition of what would constitute a fiscal cliff in the SA context is “that point where social grant expenditure and civil service remuneration will absorb all government revenue”.
This differs from the meaning in the US, where the term is typically used in reference to the “debt ceiling” — a legislated ceiling on the borrowing capacity of the federal government.
In their published paper, the SA
Eresearchers show that social grants and civil service wages will consume all government income over the coming decade if the expenditure trends observed from 2008/ 2009 to 2011/2012 are allowed to continue unchecked. Even unthinkable tax increases — like instituting a 72% marginal tax rate (a level used in the early 1970s) on taxable income above R2m/year — would be unable to do more than delay the process by a year or two.
In parliament last week, Rossouw presented two scenarios: one in which SA tumbles over a fiscal cliff by 2035 and a second in which expenditure on social grants and wages is more contained but still rises from 54% now to 60% of state spending over this period.
In scenario one, “More of the Same”, the researchers assume that government bows to political pressure to raise the age of child care grant beneficiaries from 18 to 21 and make old-age grants available to all over the age of 60. Both reforms have been proposed by various cabinet ministers in the past few years. The researchers estimate that together these reforms would cost the fiscus an extra R31bn/year.
In addition, social grants are assumed to increase at the same average rate as in the past, rising annually by one percentage point above inflation.
At the same time, they assume that civil service remuneration will continue to rise at the rate recorded between 2008/2009 and 2011/2012. During this time it grew by 13%/year owing to wage increases, notch and structural adjustments and annual average employment growth of 2,6%.
If these trends persist, they find that SA would find social grants and public service wages consuming 100% of government revenue by 2035, assuming no real tax changes are made.
“SA cannot afford an extension of social grants, and the current public servants’ wage agreement is unaffordable,” says Rossouw. “Allowing these trends [to go] unchecked and allowing an extension of social benefits leads to the fiscal cliff.”
However, the researchers show that SA can move from tumbling over a cliff to