Abstract

ROSSOUW, Jannie; JOUBERT, Fanie  and  BREYTENBACH, Adèle. Modelling South Africa's fiscal choices: Cliff or plateau?. Tydskr. geesteswet. [online]. 2016, vol.56, n.2-2, pp.534-554. ISSN 2224-7912.  http://dx.doi.org/10.17159/2224-7912/2016/v56n2-2a2.

This paper assesses fiscal developments in South Africa since earlier research (Rossouw, Joubert & Breytenbach 2014) showed that South Africa is heading for a "fiscal cliff. The earlier research found that government expenditure on social grants and civil service remuneration has become unsustainable. A continuation of trends recorded in these two expenditure items between 2008 and 2012 implied that all government revenue will be accounted for by these two items by 2026, hence the notion that South Africa faces a "fiscal cliff'. No income will be left for other expenditure items. Rossouw, Joubert and Breytenbach (2014) showed that the fiscal cliff could still be averted, but that the South African government should take timely steps to ensure such aversion. This paper reassesses the earlier analysis by expanding the research to cover data from the 2014 Medium Term Budget Policy Statement (2014 MTBPS) and Medium Term Expenditure Framework, the 2015 and 2016 Budgets and also covers subsequent developments. In its response to the research warning of a fiscal cliff facing South Africa based on data up to 2012, the South African government has given mixed signals. On the one hand, the budgeted increases in civil service remuneration and social grant expenditure have been contained over the budget period to 2017/18. On the other hand, Government executives make contrary statements, while actual remuneration adjustments for civil servants from 1 April 2015 exceed budgeted remuneration. However, employment growth has been contained. The Minister of Social Development responded to a question in Parliament by saying, inter alia, that "(t)he Department plans to extend the Child Support Grant (CSG) to the age of 21 and not 23. The main reason for extension is to align the CSG and Foster Child Grant (FCG). ... Should the policy be approved the extension of CSG to 21 will be introduced in phase format, starting with 18 - 19 in the first year, 19 - 20 year old in the second year, and finally 20 - 21 year olds in the final year. The extension will cost about R1,2 billion in the first year, R2,2 billion in the second year and R3,3 billion in the third year. Overall, about 750 thousand children are set to benefit from extending the CSG" (National Assembly, 2015). We disagree with the Minister's assumptions, as our calculations show that the cost will amount to some R8 billion per annum at current values, once fully phased in. In civil society there is a general view that the government uses social grants to ensure support for the ANC government. Although this matter has not been the topic of extensive research, there is some evidence supporting this view. For example, in the run-up to the general election in South Africa in 2014, the ANC Member of the Executive Council for Agriculture in KwaZulu-Natal, Mr Meshack Radebe, stated that recipients of social grants who do not vote for the ruling ANC, steal from the government. It is disconcerting that Mr Radebe clearly confuses the ruling party and governmental activities. On 27 February 2013 the Minister of Finance stated that "... the old age grant means test should be phased out by 2016, accompanied by offsetting revisions to tax structures..." (Republic of South Africa 2013a), implying that all South Africans over 60 would qualify for old age pensions. Such expansion implies that some 1,5 million more people of age 60 and older will qualify for an old age pension, amounting to additional expenditure of some R25 billion per annum at current values. However, the implementation date for this proposal was subsequently postponed. This paper analyses these aspects by means of an econometric model and two scenarios for South Africa's fiscal future. The finding is that the country can move from a fiscal cliff to a fiscal plateau if control is maintained over social grant expenditure and civil service remuneration growth, over and above other government expenditure. To the contrary, if the number of social grant recipients is increased and the historic growth trends in civil service remuneration and employement are maintained, a fiscal cliff is inevitable.

Keywords : government expenditure; fiscal cliff; government income; government revenue; income distribution; tax burden; tax increases; social spending.

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