Finance Minister Enoch Godongwana.
The budget debate has become a theatre of rancorous noise. Political parties, having chosen to bicker over changes in VAT rates and inflationary adjustments on personal income tax thresholds, have overlooked what they all seemingly agree on.
Most parties in parliament concede that the current fiscal framework is unsustainable and requires radical reform. A big part of that, most would concede, involves greater work on the expenditure side, providing an important and opportune moment for a richer civic discussion on the budget. It is in that spirit that we write this article.
While the distributional effect of VAT and “bracket creep” is regressive, we do not believe that this is the sole question that should occupy us. Precisely as the fallout from American trade policy has spiked 10-year bond yields as a signal of base rates for borrowing across the economy but also the terms on which the state will borrow.
This raises another fundamental question relating to how and where the state spends the money collected from either revenue proposals or public borrowing requirements. This question uncovers institutional and other challenges in the state, not just in relation to what it collects, but how it spends what it collects.
The fixation on VAT — a regressive but easy-to-collect revenue stream — distracts from the real crisis unfolding on the expenditure side. Our country faces pervasive public goods unavailability and service delivery crises, despite its over R2 trillion gross revenue take. Until parties shift their focus from tax tinkering to more stringent expenditure accountability, South Africa’s fiscal debates will remain esoteric exercises with little effect on citizens.
The VAT obsession: A convenient distraction
The VAT discussion, as in 2018, has become a political football. Amid the rivalrous chatter about it lies a concerning reluctance to confront systemic execution failures in expenditure. The 2018 VAT panel, appointed by then minister Nhlanhla Nene to consider a list of food and non-food items to incorporate in the basket of VAT zero-rated goods, made an important and prescient observation — it would be cheaper to return the cost of the VAT increase to the poorest households by expenditure programmes than to extend zero rating.
The panel further noted that the challenge rested in the extent to which social wage and public goods-focused investments actually reach “the bulk of low-income households” — whether the money spent ultimately benefited townships, villages and cities with the envisaged growth, investment and jobs.
Expenditure: Where the real crisis lies
Municipalities and state-owned entities are the main agencies seized with capital expenditure on roads, bridges, clinics, schools, treatment works and dams, among others. These are areas crucial to economic and social activities.
The South African legal framework requires that budgets of organs of state are spent in an economic, efficient and effective manner. The auditor general highlights the effect of underspending of conditional grants linked to service delivery contributing to delays in completing infrastructure projects aimed at improving service delivery to communities.
So too have we seen crucial grants made to state-owned companies for commuter rail, passenger bus services and other service-focused infrastructure being chronically underspent.
The reasons? Poor project management, ineffective contract management and delays in procurement processes rank high as causes for chronic underspending in municipalities and state-owned entities.
From VAT battles to spending realism
While proposing a way forward might be tricky, a starting point has to be “systemic” rather than “episodic’” issues. For instance, is it still sustainable to assume that over 200 local authorities will all have the personnel and other capacity to spend on capital budgets linked to their areas of functional authority? Or that receiving a 10th of nationally collected revenue they can build long-term institutional capability without “own revenue” from a taxable base, if they have no industry in their areas?
Similarly, do demarcations and the functional borders in our areas reproduce ethno-national boundaries while lacking some administrative-industrial articulation that could make these viable subnational boundaries? What role is there for state-owned entities which might have the capacity and scale economies to deliver in these areas?
South Africa’s political parties are stuck in a VAT-centric timewarp, debating tax rates while the quality of services declines. The budget is not a piggybank to be cracked open or guarded; it is a tool to build a society that works. If parties cannot shift their focus from how much we tax or borrow to how well we spend, election manifestos are rendered obsolete.
The people need more than a debate on the regressivity of VAT. That is moot. They need a government that can fix a pothole. And fast.
Chrispin Phiri is the spokesperson for the department of international relations. Ayabonga Cawe is the chief commissioner at the Trade Administration Commission of South Africa. The authors write in their personal capacities.
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