Budget AD 2013: The big squeeze cometh!

In a media briefing ahead of the presentation of the R1.15 trillion 2013 budget on Wednesday, Finance Minister Pravin Gordhan was quite forthright: the economic climate is “tough” and “tight fiscal conditions” necessitate R10.4 billion in spending cuts. But despite the large shortfall in tax revenue, slow growth of 2.7% and expanding deficit, government was managing the fiscus so as not to impose tax increases on South Africans, Gordhan said.

He said despite the slashing of expenditure, it would not go to the extent of introducing austerity measures. The increased deficit of 5.2% of GDP was due to revenue loss rather than expenditure levels, but there was a determination by government to manage expenditure, Gordhan said. Expenditure in the South African economy exceeded the value of production and income by about R190 billion last year.

“We find ourselves in a challenging period, with revenues lower than expected by R16.3 billion compared with estimates at the time of the 2012 budget. This is predominantly due to weak economic growth during the second half of 2012, mining sector disruptions and lower commodity prices,” Gordhan said during the presentation of the budget in Parliament.

Though South African taxpayers escaped having to fork out more this year, and instead received personal income tax relief of R7 billion, higher taxes will be needed in future to finance the National Health Insurance (NHI) scheme. There was no budget allocation for the NHI in this year’s budget. Gordhan said though the initial phase of the scheme’s development would not place new revenue demands on the fiscus, a tax increase would be needed in coming years. Though there are implementation delays due to the consultation process, it is clear that the NHI is one of the ANC’s ambitious plans Gordhan had to be pragmatic about and hold off due to revenue constraints.

Gordhan said the tax policy review team, announced by President Jacob Zuma in his State of the Nation Address, would by headed by Judge Dennis Davis. The terms of reference of the review, which could lay the basis for increased taxation including in mining, would be announced in due course, the finance minister said.

The boldest move in the 2013 budget is the introduction of a “developed” version of the controversial youth wage subsidy, now referred to as a “youth employment tax incentive”. Despite Cosatu’s fierce objections, the ANC decided earlier this year that incentives for youth employment should go ahead. Though Zuma deferred the issue to the National Economic Development and Labour Council, Gordhan bit the bullet. “A revised youth employment incentive will be tabled in the House, together with a proposed employment incentive for special economic zones,” he said.

Though the Democratic Alliance says this is a watered-down version of the youth wage subsidy, with R500 million in funding instead of the R1.6 billion initially earmarked for the original version, the Treasury set out an elaborate explanation in the Budget Review document to clarify that the proposed tax incentive took into account organised labour’s (read Cosatu’s) concerns.

“As part of a package of measures aimed at boosting opportunities for young work seekers, government recognises the need to share the costs of expanding job opportunities with the private sector… To complement existing programmes, a youth employment tax incentive aimed at encouraging firms to employ young work seekers will be tabled for consideration by Parliament. The introduction of this tax incentive, which takes into account the concerns of organised labour, will help young people enter the labour market, gain valuable experience and access career opportunities. Protection provided by existing labour legislation, combined with oversight by the South African Revenue Service and the Department of Labour, will avoid displacement.”

The scheme will give employers tax breaks through the PAYE system and the impact on the fiscus will therefore be a shortfall in revenue rather than any direct costs. The move has been welcomed by the ANC and the opposition, some parties caution that there could be further variations by the time the proposal makes it to Parliament.

Gordhan talked particularly tough on procurement and combating corruption in government. “While our ablest civil servants have had great difficulty in optimising procurement, it has yielded rich pickings for those who seek to exploit it. There are also too many people who have a stake in keeping the system the way it is.

“Our solutions, hitherto, have not matched the size and complexity of the challenge. As much as I want, I cannot simply wave a magic wand to make these problems disappear. This is going to take a special effort from all of us in government, assisted by people in business and broader society. And it will take time. But we are determined to make progress,” Gordhan said.

A chief procurement office is being set up in the National Treasury and an announcement regarding the appointment of a chief procurement officer is expected soon. A high-level project team with people seconded from state agencies and the private sector was working on immediate remedial actions, and improving and modernising the current system, Gordhan said.

The office of the Public Protector is among the entities receiving increased funding this year.

Asked whether there was sufficient heed being taken of his consistent belt-tightening appeals in government, Gordhan said perceptions that he was not being listened to were not true. He said there were, however, “areas of extravagance” but these were “on the margin”. He stressed the need to reduce the channels and authority for government procurement, and said non-performance and over-pricing were also areas of concern.  

The budget was widely welcomed, with both the ANC and the DA claiming their policy proposals had informed the budget allocations.

ANC secretary general Gwede Mantashe said that funding had been allocated to all the programmes the ruling party had agreed on. He welcomed in particular the youth employment tax incentive, extra spending on education and the special focus on corruption.

DA finance spokesman Tim Harris said his party was pleased that “key DA economic policies have been included”. Among these he listed the “modest” version of the youth wage subsidy, a R2.9 billion tax incentive package for special economic zones, minor reforms of small business taxation totalling R360 million and increased tax deductibility of charitable donations.

Cosatu reacted to the budget late last night, expressing general disappointment in the “business as usual approach, despite evidence of a burning Rome”.

“We are disappointed that social grants will be increased by a mere 4% on average over a period of three years. In the context of high levels of unemployment and poverty, social grants play an important role in helping the poor to put bread on the table. We are getting increasingly frustrated by the failure to introduce comprehensive social security in the country that will ensure that nobody falls through the safety net. We reject the piecemeal reforms of the retirement fund and want these reforms to be part of the comprehensive social security.”

Cosatu also said it found it unacceptable that there was no allocation for the NHI. As anticipated, the labour federation shot down the youth employment tax incentive.

“We reiterate our rejection of the Youth Wage Subsidy as an incentive for employers to hire young people. This is not a solution to the unemployment crisis facing young people,” Cosatu said.

While the 2013 budget elicited varied reactions, including the IFP’s Mario Ambrosini’s view that it was “last year’s budget in a new dress”, the biggest warnings came from Gordhan himself. He said South Africa needed to break the 2.5 - 3% barrier of growth “that has been plaguing us for some time”, and find new ways of raising higher revenue in order to meet targets and ensure stability.

With little room to manoeuvre and in his penultimate presentation before the next general elections, Gordhan managed to present a well-rounded budget that managed to mollify almost everyone. However, the time will come when the taxpayer will feel the burden of the unfavourable economic conditions. For now, it’s small doses of pain – more belt-tightening, more sin taxes and higher fuel levies.

Even with all those short- and long-term painful medicines, there was one bright point in the budget speech: The minister himself. Year after year, Pravin Gordhan keeps convincing us that, behind the scandals and chilling stories of incompetence of biblical proportions in many arms of our government, there’s a core of experts who appear to still know what they’re doing. In the wake of Lulu’s Xingwana’s latest attempt to plumb the depths of the abyss of idiocy, Gordhan delivered more than just a budget: he delivered hope that there are still grown-ups in the government’s house. DM

Photo: Finance Minister Pravin Gordhan delivers his 2013 budget speech at Parliament in Cape Town 27 February 2013. South Africa cut its 2013 economic growth forecast due to subdued demand from export markets and projected a slightly wider budget deficit than previously forecast because of revenue collection undershooting targets. REUTERS/Stringer