south africa’s fiscal cliff revisited: presentation to the standing and select committees on...

SOUTH AFRICA’S FISCAL CLIFF REVISITED:PRESENTATION TO THE STANDING AND SELECT

COMMITTEES ON APPROPRIATIONS OF THE PARLIAMENT OF THE REPUBLIC OF SOUTH

AFRICA

October/November 2014

Jannie RossouwHead: School of Economic and Business Sciences, University of the Witwatersrand

Fanie JoubertDepartment of Economics, University of South Africa

Adèle BreytenbachDepartment of Economics, University of South Africa

1

INTRODUCTORY SUMMARY

• This presentation analyses:

• the fiscal cliff facing South Africa

• social assistance expenditure

• the remuneration of civil servants

• tax revenue increases for the South African fiscus

• This presentation expands the findings of Rossouw,

Joubert and Breytenbach (2014) which identified the

danger of a fiscal cliff facing South Africa

• The South African fiscal cliff is described as the point

where civil service remuneration plus social grant

expenditure equal government revenue 2

INTRODUCTORY SUMMARY

• By 2012 it was clear that the South government was

heading for a fiscal cliff with social assistance

expenditure and the remuneration of civil servants

exceeding all government revenue by 2026 if allowed

to continue unabated

• Based on trends between 2008 and 2012, not even tax

increases to raise revenue could have averted a fiscal

cliff

3

5

SOURCE: BUSINESS DAY, MONDAY, 27 OCTOBER 2014

SOCIAL GRANTS: SUBSEQUENT DEVELOPMENTS

• Trends are concerning and confusing (e.g. an expected

decline in child support grant post 2020?)

• Number of grant recipients expected to increase from 16 052

000 (2014/15) to 16 309 000 (2015/16), 16 520 000

(2016/17) and 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

6

7

GRANTS

Source: 2014 Budget Review: 44

8

SOCIAL ASSISTANCE: COST AND NUMBER OF RECIPIENTS

Source: 2014 Budget Review

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.

• It seems that growth rate in this expenditure item has

declined, but it still requires careful monitoring

9

COMPENSATION ACCOUNT OF THE SOUTH AFRICAN GOVERNMENT: SUBSEQUENT AND CURRENT DEVELOPMENTS

• The number of employees in the public sector (central

plus provincial government) increased at a steady rate of

some 3,1 per cent per annum since 2005

• Although some deceleration in this growth trend was

discernible in in the 2012/13-fiscal year, civil service

employment has again accelerated in the 2013/14-fiscal

year

• It is still to early to assess the growth rate in the 2014/15

fiscal year, but this growth rate is essential for averting

the fiscal cliff (see next slide and 2014 MTBPS) 10

TABLE 2: PUBLIC SERVICE EMPLOYMENT, 31 MARCH 2005 TO 30 JUNE 2014

Sources: Breytenbach and Rossouw, 2013, SA Reserve Bank, Statistics SA [S.a.]

Central government

Provincial government

Total* Percentage change (y:y)

31/03/2005 369 500 823 677 1 193 117

31/03/2006 385 441 860 580 1 246 021 4.4%

31/03/2007 407 489 889 652 1 297 141 4.1%

31/03/2008 405 805 938 173 1 343 978 3.6%

31/03/2009 418 879 967 740 1 386 619 3.2%

31/03/2010 410 051 1 006 793 1 416 844 2.2%

31/03/2011 427 281 1 047 990 1 475 271 4.1%

31/03/2012 443 199 1 075 515 1 518 714 2.9%

31/03/2013 454 757 1 084 197 1 538 954 1.3%

31/03/2014 454 096 1 116 404 1 570 500 2.0%

30/06/2014 455 701 1 118 748 1 574 449 n/a

11

* These figures do not include local authorities, nor other public-sector

enterprises

Sources: SA Reserve Bank, Statistics SA [S.a.], own calculations

Budget Total, Rbn

(MTBPS)Percentage change

(% y:y)

2007/08 195,0

2008/09 232,519.2%

2009/10 273,117.5%

2010/11 309,913.5%

2011/12 346,011.6%

2012/13 375,08.4%

2013/14 411,3 (407,6)9.7% (8,5%)

2014/15* 439,4 (440.7)6.8% (8,1%)

2015/16* 468,7 (470.6)6.7% (6,8%)

2016/17* 499,0 (501.8)6.5% (6,6%)

2017/18* N/A (533.5)6.5% (6,4%)

12

PUBLIC SERVICE COMPENSATION

COMPENSATION ACCOUNT OF THE SOUTH AFRICAN GOVERNMENT

• It is too early to predict an overall decline in the growth

trend since 2005

• The central government’s compensation account increased

from R195,0bn in 2007/08 to a budgeted R440,7bn (MTBPS)

in 2014/15, which is equal to an average increase of 12,4

per cent per annum

• For 2014/15 to 2017/18 the budgeted increase is in the

region of 6 to 7 per cent per annum. This seems too low,

given recent history. However, the success or otherwise of

the MTBPS (and South Africa’s all-over fiscal sustainability)

depends on this point13


An analysis by Breytenbach and Rossouw (2013) shows that the

increase in the government’s compensation account is

attributable to:

• inflation;

• structural changes in public service compensation and in

particular larger compensation increases for senior staff;

• growth in public service employment on national and

provincial levels;

• annual remuneration increases;

• notch increases and promotions; and

• senior appointments from outside due to an expansion in

the number of government departments14


The following assumptions based on Breytenbach and Rossouw (2013) were used to

restate the civil service renumeration budget for the period 2014/15 to 2016/17:

•Employment growth at 3,1 per cent per annum

•General remuneration adjustment: Inflation (6 to 6,5 per cent p.a.) plus 1 percentage

point (includes some provision for annual notch adjustments, but not for structural

adjustments)

Restated civil service remuneration budget, based on these assumptions:

•2014/15 fiscal year: R448,4 billion, rather than R440,7 billion as is budgeted

•2015/16 fiscal year: R493,2 billion, rather R470,6 billion as is budgeted



•Cumulative expenditure underestimation of some R136 billion over these four fiscal years

•The implication is clear: South Africa must limit the size and growth of its civil service if it

wants to avert a fiscal cliff15

• The baseline analysis accepts the assumption that the take up rate in social grants will increase for the next decade and then level out

• It is assumed that the economy will grow as announced by the Minister of Finance and by 3 per cent per annum from 2018

• It is also assumed that government remuneration will increase by 10 per cent p.a., based on:

– Inflation adjustment of 6,9%– Number of employees increasing by 3,1%

• An extra scenario, the effect of a 15 per cent increase in civil

service remuneration (rather than 6,9 per cent) for 2015 to

2017 , is also shown in the result below

FISCAL POSITION

16

RESULTS

17

• This analysis still shows a fiscal cliff approaching, but further in the distance as in earlier research

• It is therefore necessary to contain growth in civil service employment and ideally the size of Cabinet should be reduced to help in achieving this objective

• There is no scope to increase civil service remuneration by more than the rate of inflation plus 1 percentage point

FISCAL CLIFF AVERTED?

18

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

• It is not stated whether these are nominal or real amounts

• Adjusted for inflation over the three fiscal years, the funding need

increases considerably (assuming an inflation rate of 6 per cent per

annum): R12,4 billion (rather than R12 billion) in 2015/16, R16,4

billion (rather than R15 billion) in 2016/17 and R19,7 billion (rather

than R17 billion) in 2017/18. The total funding need then amounts

to R48,5 billion, rather than R44 billion as stated.

• This implies new and additional taxes to raise the revenue

• Opportunities for increasing revenue is very limited 19

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

GOVERNMENT REVENUE BY SOURCE 2014/15 – FISCAL YEAR

* Specific plus Ad valorem excise duties **

Balancing Item 20 Source: 2014 Budget Review: 132

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, but other sources can also make a contribution

• In the calculation of an increased tax burden a 10 per cent 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.

• Possibilities:

• The introduction of two additional marginal tax brackets: 45 per cent for taxable

income above R1 million per annum and 50 per cent for taxable income above

R2 million per annum

• Increases around 10 per cent in other main revenue sources as highlighted below

• The exception is customs duties:

• Practically the whole amount collected is paid to Botswana, Lesotho, Namibia and

Swaziland, South Africa’s partners in the Southern African Customs Union (SACU)

• Given South Africa’s own fiscal needs, it is clear that this subsidisation of South

Africa’s SACU partners can no longer be afforded

21

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




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

MARGINAL TAX RATE STRUCTURE WITH TWO PROPOSED EXTRA BRACKETS (ASSESSMENT

2014/15)

Tax RebatesPrimary R12 726Secondary R7 110 (persons 65 and older)Tertiary R2 367 (persons 75 and older)

22 Source: National Treasury, own calculations

Revenue/income source Amount before

adjustment (R billion)

Proposed adjustments

Additional Income

Reductions Revised additional

income

Amount after adjustment

and reductions

(R billion)

Personal income tax335,9

Marginal rate adjustments

7,5 -0,8 6,7 342,7

Value-added tax (VAT)267,2

Rate adjusted to 15%

19,1 -1,9 17,2 284,4

Corporate income tax198,9

Rate adjusted to 30%

14,2 -1,4 12,8 211,7

Excise duties* 31,1

10 percent extra 3,1 -0,3 2,8 33,9

Fuel levies47,5

10 percent extra 4,8 -0,5 4,3 51,8

Customs duties50,3

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)

62,7Assumed additional

R1bn1,0 -0,1 0,9 63,6

Subtotal993,7

N/a 49,7 -5,0 44,7 1038,3

Non-tax revenue20,9

N/a N/a N/a N/a 20,9

SACU-51,7

N/a N/a N/a N/a -51,7

Total962,8

N/a 49,7 -5,0 44,7 1007,5

ADJUSTED GOVERNMENT REVENUE BY REVENUE SOURCE

*Specific plus Ad valorem excise duties.**Balancing item 23

Source: 2014 Budget Review: 132, own calculations

FINAL REMARKS AND CONCLUSIONS

• A fiscal cliff has not yet been averted but is further in the distance than in

2012

• It is necessary to contain growth in civil service employment and ideally

the size of Cabinet should be reduced to assist in limiting expenditure

• Limiting government expenditure is preferable to the raising of taxes in an

effort to avert a fiscal cliff

• There is no scope to increase civil service remuneration by more than the

rate of inflation plus 1 percentage point. An increase of 15 per cent can

simply not be afforded as it will push South Africa over the fiscal cliff

• The room for raising extra income through increased taxation is very

limited

• An additional tax burden will impact negatively on the economy’s growth

performance 24

FINAL REMARKS AND CONCLUSIONS

• Practically the whole amount collected as customs duties is paid to

Botswana, Lesotho, Namibia and Swaziland, South Africa’s

partners in the Southern African Customs Union (SACU)

• Given South Africa’s own fiscal needs, it is clear that this

subsidisation of South Africa’s SACU partners can no longer be

afforded

• The 2014 MTBPS indicates that government has taken notice of

the nearing fiscal cliff identified by Rossouw, Joubert and

Breytenbach (2014)

The implication is clear: South Africa must limit the size and growth

of its civil service and ideally reduce the size of its Cabinet if it

wants to avert a fiscal cliff 25

QUESTIONS/DISCUSSIONSelected 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. pp.635-650

•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-labour-news/18780-gauteng-education-mec-moots-exemption-of-teachers-from-income-tax.html. [Downloaded on: 14 July 2014]

•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. pp. 144-162

•SA Reserve Bank: Various sources26

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