This year’s budget will be delivered in a very challenging environment. Revenue is under pressure from sluggish economic growth, while demand for higher spending is rampant. The simmering “fees must fall” campaign, struggling state owned entities and the need for infrastructure development and maintenance are but a few of the elements tugging at government finances.
Firstly, for the minister personally, it will be difficult given that his head is widely speculated to be on the political chopping block. He will do his utmost to deliver a budget that balances populist demands and ratings risks.
Secondly, South Africa’s lower than expected economic growth will impact negatively on revenue and this means that tax increases are inevitable. In fact, the minister will need to raise as much as R28 billion. Furthermore, expenditure will need to be chopped by R10 billion, placing further pressure on the consumer economy as the government spends less and pumps less into the economy.
Where could the minister find the additional R28 billion revenue that is required? He does have several options open to him, but we must be cognizant of the fact that he is likely to opt for a middle road in his choice of solution – so some are far less likely to be utilised. He will be helped in his task by fiscal drag: as salaries rise to match inflation, taxpayers are pushed into increasingly higher tax brackets thus netting additional revenue for the fiscus. For this reason, I don’t expect much by way of bracket relief – I don’t think that he will adjust the tax brackets as much as would be suggested by the current rate of inflation, other than perhaps for the lowest income bands. In fact, it’s more than likely that the tax rate for the top bracket will be increased by 1%. These two measures alone should bring in an additional R10 billion of revenue.
Next, the minister has the choice of increasing the VAT rate by 1% which could deliver as much as R20 billion. But I hasten to add that this is extremely unlikely in such a politically sensitive year. What’s more probable, in light of the president’s State of the Nation Address on 9 February, and given his tone and language, is an increase in Estate Duty and even a doubling of Capital Gains Tax. Together, these two measures could deliver as much as R5 billion in additional tax revenue.
If the minister succeeds in balancing these opposing variables, South Africa could well avoid a credit rating downgrade. However, should we face the expected political turmoil during the ANC’s presidential election year, both bond yields and the rand could come under severe pressure. This means that Treasury would have to issue more bonds into the capital market to finance the budget deficit and this could also place further pressure on bond yields.
The various global uncertainties, along with domestic funding pressures emanating from various quarters – from students to state owned enterprises – will ensure that the 2017 national budget will be very closely watched by politicians, rating agencies, the capital markets and taxpayers of South Africa.
~ George Herman, Head of South African Portfolios, Citadel
Government budgets across the world are often delivered with some fanfare. South Africa is no exception. In February every year South Africa’s Minister of Finance presents his Budget Speech to Parliament amid national excitement.
As the biggest event in Parliament besides the State of the Nation Address by the president, the budget speech sparks robust and emotional debates.
Although attention is focused on the speech, there’s a great deal about the budget process that isn’t well known. For example, it is incorrect to say that the Minister “announces” the final budget. Budget proposals only have legal standing once Parliament has followed a particular process to approve them.
What this means is that important components of the budget are still being processed months after the minister gives his speech. While it’s true that tax changes announced by the minister come into effect immediately, they can in fact be reversed months later.
The reason for this process is that it gives the public and its political representatives final oversight of budget decisions. This is appropriate given that the budget has profound implications for the lives of ordinary citizens and can have a major impact on economic activity. For example, raising revenue through taxes and allocating a large proportion to social spending can significantly reduce inequality.
Ultimately a budget reflects the social and economic responsibilities, and priorities, of government, balanced against the responsibility to ensure public finances are sustainably managed.
The legal process
The country’s constitution requires that there be a process for Parliament to amend “money bills”. These are proposed pieces of legislation that would either change the way revenue is raised, or the way in which government funds are allocated for expenditure. Most revenue raised through taxes goes into the national revenue fund. An allocation of these funds is called an “appropriation” because, to be spent, the money has to be appropriated from the fund.
The Money Bills Act that outlines this process is oriented around four main components of the budget that must be approved. These are:
- The fiscal framework: This provides estimates for overall government expenditure, revenue and, importantly, borrowing for the coming fiscal year.
- Revenue proposals: How government plans to raise revenue, including any changes in taxes or tariffs and any new taxes.
- The division of revenue bill: This determines how revenue is split across the local, provincial and national spheres of government.
- The appropriations bill: This determines how funds for national functions are split across departments and other entities.
The fiscal framework and revenue proposals must be approved by Parliament’s two finance committees, while the Division of Revenue and Appropriations Bills must be approved by the appropriations committees. South Africa’s two houses of parliament – the National Assembly and the National Council of Provinces – then need to consider and adopt the reports of these committees.
Beyond the speech, many professionals, analysts, journalists and politicians, interact with the Budget Review. It contains a lot of useful and interesting information, which is one reason South Africa scores highly in international budget transparency measures. But besides a table showing the proposed fiscal framework, and a section describing revenue proposals, it is mostly of no legal significance. The critical documents are the actual pieces of legislation.
What Parliament must approve
Within 16 days after the minister has delivered his speech the finance committees of the two houses have to hold meetings and public hearings. Each committee must also submit a report to the relevant house indicating whether they approve the fiscal framework and revenue proposals, or propose amendments.
There are a few oddities. For example, the actual bills that contain the tax proposals are often only given final consideration six months later in the year. So, in theory, a tax change could be announced in the budget, be given initial approval by Parliament and then six months after it has already been implemented be amended or rejected.
Although it confers significant powers on Parliament, the Money Bills Act also imposes strict constraints. The rationale is that it obliges members of parliament to first agree on a sustainable level of national government borrowing (debt) before entertaining demands or requests from various spheres of government, or national departments, for more funds. Some view this as a “fiscally conservative” approach, although it’s possible to get around the constraints if there is a genuine desire or need to do so.
The turnaround time for the fiscal framework decision is only 16 days. The time for the Division of Revenue is also short: only 35 days to get the Bill passed. Bear in mind this requires consulting with all relevant stakeholders, holding public hearings, drafting committee reports and debating the reports in the National Assembly and the National Council of Provinces.
But there’s a full four months to pass the Appropriations Bill, which determines how money is split across national departments and other institutions. The reason for this is that the process requires consideration of all the relevant “votes” (allocation to specific departments or institutions). And any substantial changes to how money is going to be allocated would need to be negotiated across multiple votes.
Public input and accountability
The South African budget approval process is accompanied by an extensive public consultation process, required by the Constitution and Money Bills Act. While the Minister of Finance asks for public input prior to the budget speech, there is only so much scope for him to accommodate suggestions. Given how technical the budget is, the National Treasury has to focus its drafting efforts on engaging with national, provincial and local government. The parliamentary process therefore ensures that the public get the opportunity to make inputs into the final decisions.
South Africa’s parliament has not yet, to my knowledge, made meaningful amendments to the budget. There are two main reasons: lack of political inclination and lack of technical capacity.
Nevertheless, in a time when there are concerns about interference in the sound management of public finances and a greater appreciation for Parliament’s oversight function, it may be reassuring to know that it has substantial oversight powers in this area.