Taxes and spending: Efforts are being made to balance the budget via long-term development plans

The endorsement of the National Development Plan (NDP) by the ruling African National Congress’s (ANC) Mangaung policy conference in December 2012 was an encouraging sign for South Africa’s private sector. Further, the election of one of the NDP’s chief architects, billionaire businessman Cyril Ramaphosa, as deputy president of the ANC reflected a clear desire to expedite the plan’s implementation. Faced with a constrained fiscal space, the administration is seeking to rein in growth in recurrent spending while channelling more funds towards development expenditure, such as infrastructure, just as it improves standards for budget execution.

Development Planning

Alongside the New Growth Path (NGP), an economic policy focused on job creation, and sectoral policies such as the Industrial Policy Action Plan (IPAP), the NDP forms the strategic framework for policymaking over the next 17 years. The NGP, released by the then newly formed Economic Development Department in December 2010, aims to reduce unemployment by 10 percentage points to 15% by 2020, creating 5m new jobs, by focusing on six priority sectors, including agriculture, mining, manufacturing, the green economy, tourism and infrastructure development.

Endorsed by labour unions, the plan established a policy direction that frames various sectoral action plans in energy, industry and other sectors. “The NGP now being implemented has been crucial in creating a momentum that was not there before and in starting to shift the trajectory of economic development, for instance in areas such as green industries, which have been identified as significant drivers of job creation,” Jorge Maia, the head of research and information at the Industrial Development Corporation, told OBG.

Key to this is the development of a “competitive supply and development programme”, meant to create domestic supply chains for key industries and maximise the impact of large projects, such as the infrastructure development programmes pursued by state-owned enterprises (SOEs). Three successive IPAPs have focused on establishing clusters of producers and suppliers in key industries like clothing, textiles, automotives, leather and footwear, as well as business process services (see Industry chapter).

The more recent NDP, first published in November 2011, follows the same broad policy objectives in a longer-term vision to 2030. The nearly 500-page document sets the broad policy aims of attaining annual growth rates of above 5% in an effort to eradicate poverty, curb inequality, universalise health care, implement wholesale reform of the education system and improve the professionalism of police, alongside other efforts to increase the efficiency of the state. With a significant role earmarked for the private sector, the NDP sets a goal of channelling some 10% of GDP towards public infrastructure investment over the long term. “The NDP’s targeted spending of some R100bn ($12.2bn) requires significant involvement from the private sector,”

Miller Matola, CEO of Brand South Africa, told OBG.

Boosting Numbers

Meanwhile, the plan aims to increase labour market participation from 54% in 2010 to 65% by 2030 out of the total working age population (of those between 15 and 65) rising from 32.4m to 38.8m in the same span. This growth in formal employment from 17.5m to 25.3m people would foster a drastic drop in unemployment from 25% to 6%. While the NGP’s overarching goal is employment creation, the NDP broadens this objective to include economic growth and private sector participation.

“Private enterprise tends to be more focused on meeting delivery criteria, and in turn you tend to get a better quality of output,” Andy Baker, the regional president for Africa at G4S, told OBG.

Despite criticisms of a perceived lack of detailed spending plans, the NDP has been welcomed by the investment community for moving from a protectionist rhetoric towards reforming specific structural constraints on growth. “As we get this alignment between the NDP and government departments, our aim will be to weed out all projects and programmes that are not relevant to the focus areas that we think need to be advanced in South Africa,” the minister of finance, Pravin Gordhan, told local press following his budget speech in February 2013.

Constrained Policymaking

Although the NDP has been well received by the business community, long-running scepticism about the government’s ability to implement economic policy and curb the sustained growth in recurrent expenditure reemerged in 2012. Recurrent spending, including that on education and health, accounted for around 65% of budgeted expenditure in the 2012/13 fiscal year. With an estimated 16m South Africans on government welfare grants in 2013 and 2.5m people employed in the public sector, social wages and benefits account for the single biggest component of the budget, at 60% in 2013/14, according to the Treasury, and growing at an average of 8.3% annually since 2008/09, according to Standard Bank. Staffing unfilled vacancies in government departments could increase this burden further. “If the government filled all public sector vacancies, we estimate this would add some 10% to the government’s wage bill,” Joan Stott, a leadership fellow at the Mo Ibrahim Foundation and advisor to the president of the African Development Bank, told OBG.

Interest Payments

Meanwhile, as the government’s on-balance-sheet debt burden rose from around 30% in 2009 to 42.4% in 2013, interest payments on sovereign debt constitutes the secondfastest-growing budget item, according to asset manager Investec. With some R340bn ($41.4bn) in debt maturing between 2017 and 2020, which the government expects to roll over into longer-tenured bonds at higher interest rates, the Treasury forecasts interest payments to peak at 11.3% of revenue in fiscal year 2014/15. The state’s contingent liabilities have also grown in line with significant infrastructure investments by SOEs, whose share of total public infrastructure investments has declined only slightly from 53.5% in 2008/09 to 48.4% in 2010/11. SOEs are expected to account for over three-quarters of the planned R827.1bn ($100.8bn) in infrastructure development in the three years to 2015.

The country’s debt-to-GDP burden rises to above 60% if off-budget commitments (including those of the four main investing SOEs – Eskom, Transnet, RandWater and SANRAL) are included, according to rating agencies such as Standard & Poor’s. “A key challenge is that the general government does not pick up contingent recurrent liabilities incurred by government-related enterprises and corporations,” Richard Downing, an economist at the South African Chamber of Commerce and Industry, told OBG. “This implies that part of our deficit (borrowing) is earmarked to finance recurrent expenditure and thus causing dissaving, that is financing short-term obligations by long-term borrowing.” The cost of servicing debt is forecast to reach R100bn ($12.2bn) in 2013/14. The government expects its budget deficit to decrease to 3.1% of GDP in 2015/16, with the net debt-to-GDP ratio stabilising at around 40%.

Budgeting For Growth

While acknowledging the need for fiscal consolidation over the medium term, the minister of finance has emphasised the need to move gradually. “We’ve always said to all South Africans and the globe that we believe in gradual fiscal consolidation; we cannot impose austerity on South Africans,” Gordhan said following his budget speech in late February 2013. The 2013 budget includes several of the NDP’s goals, such as the establishment of special economic zones (SEZs) following two decades of deliberations, a wage subsidy for young jobseekers, the provision of health insurance to all citizens and significant infrastructure investment. Gross expenditure is budgeted to rise from R1.06trn ($128.6bn) in 2013/14 to R1.23trn ($149.5bn) in 2015/16, with 47.6% earmarked for national departments, 43.5% going to provincial governments (predominately for education, health and social welfare spending) and 8.9% for local governments. The three main target areas of the 2013 budget, which targets a deficit of 5.2% of GDP, are education (with 20.7% of expenditure), social protection (15.7%) and health (12.6%).

While the 2013 budget does not mark a departure from previous budgets’ infrastructure plans – with the three-year expenditure for infrastructure slightly curbed from R845bn ($103bn) in the 2012 budget to R827bn ($101bn) in 2013 – it does entrench the strong growth in public investment seen in 2012. Growth in public capital spending accelerated from 4.3% in 2011 to 11.1% in 2012; by comparison private investment growth stayed relatively flat at 4.6% and 4.3%, according to Standard Bank. With the NDP requiring gross fixed capital formation to reach 30% of GDP by 2030, the pipeline of infrastructure projects has risen from R2.3trn ($280bn) for developments through 2020 outlined in the 2012 budget to R3.6trn ($439bn) of spending by 2023 in the 2013 budget. Further, R397bn ($48bn) of the R827bn ($101bn) infrastructure spending over the next three years is earmarked for SOEs, with Eskom receiving 24.7% and Transnet taking 15%. Despite a list of public-private partnerships under consideration, they are allocated just 3.1% of the three-year total. The remaining R430bn ($52bn) in investment comes from direct expenditures on schools, hospitals, water and electricity distribution, dams, and transport links, including road and rail.

Tax

Meanwhile slower-than-expected economic expansion and unrest in the mining sector in 2012 has also curbed economic growth to 9.1% year-on-year, lower than the double-digit growth originally expected, with a R16.3bn ($1.98bn) shortfall in revenue in 2012/13. This led the budget deficit to rise above the forecast 4.6% of GDP to a final figure of 5.2% in 2012. South Africa’s tax base remains small, with 5m active taxpayers (and 8m filers). Still, individual income tax accounts for some 35.1% of tax revenues, higher than the 19.5% contributed by corporations and 27.8% earned from value-added tax (VAT). The 2013 budget extends tax relief of some R7bn ($853.3m), mainly to individuals earning less than R250,000 ($30,475) annually, with tax exemptions for those earning less than R60,000 ($7314) a year. The budget’s revisions include reducing corporate income tax to 15% for firms operating in SEZs and tax incentives for small and medium-sized enterprises of 0% up to R63,000 ($7679) annual turnover and 7% up to R350,000 ($42,665).

This leaves the burden of tax on high-income earners, with asset manager Investec estimating that the top 0.006% richest South Africans contribute 37.3% of total tax revenue. The South African Revenue Service (SARS) enacted new legislation in 2012 under the Tax Amendment Code to close certain loopholes and tighten the reporting framework, while the Treasury provided for a new holding company to manage offshore subsidiaries from within South Africa, which may yet add to reported tax revenue (see analysis). The Treasury has repeatedly announced its intention to raise taxes should revenue fail to meet projections or in order to finance social security reform from 2015.

Indeed, the 2013 budget only includes two increases on the fuel levy (by 22.5%) and “sin taxes” for alcohol and tobacco, which have been raised by between 5.7% and 10%. With VAT at 14%, potential increases there could only be marginal. Instead, the government introduced smaller taxes on plastic bags, electricity and solar water heaters in the past year. The Treasury also announced the introduction of a carbon tax, worth R120 ($14.63) per tonne of carbon dioxide equivalent from January 2015, with a policy document expected in late 2013.

Improving Implementation

As the government gradually rebalances spending from recurrent allocations towards capital investments, it is facing the twin challenges of improving the efficiency of its capital expenditure as well as strengthening the administrative capacity of its sub-national tiers of government in particular. While recurrent expenditure, mainly wages and benefits, is usually disbursed in full, disbursement of infrastructure funds remains lowest at the local government level, (73% in 2010/11, for instance) and slightly higher (85%) for provinces. “Of additional concern is the fact that a sizeable R150bn ($18.28bn) of the total, 18.2%, is to be spent by local government where service delivery and capacity remains a key challenge,” Standard Bank noted in its March 2013 budget review.

Taking Control

Since 2012, the central government has intervened increasingly in sub-national administrations, taking over the financial management of a number of departments of Limpopo province in 2012, for example. The central government has also proposed the merger of certain municipalities in a bid to improve service delivery, although it was forced to suspend the merger of two municipalities in the Free State in early 2013 in the face of union and civil protests. “We do not believe the challenge of service delivery can always be resolved by merging of municipalities. If anything, local governments, which stand at the forefront of service delivery, should be strengthened while the role of our many provinces should be re-examined,” Jonas Mosia, industrial policy coordinator at the Congress of South African Trade Unions, told OBG. Indeed, a new initiative by the central government will allow the Department of Health to intervene in provinces where it is found that health care delivery is lagging.

Meanwhile, the government established the Presidential Infrastructure Coordinating Commission to oversee 17 “strategic integrated projects” in its overarching infrastructure plan in February 2012. This effort at coordinating large projects was welcomed by a number of investors and analysts, who hope it will improve the effectiveness of implementation.