Gigaba declines to cut Gordhan’s expenditure, but more realistic about income

Finance Minister Malusi Gigaba’s first mini budget was the most honest fiscal assessment in many years. It still offers no solution, but is finally more truthful about the dangerous fiscal position that Government has created over the past decade. This is the view of Piet le Roux, CEO of AfriBusiness, in reaction to the Medium Term Budget Policy Statement (MTBPS) delivered to Parliament on Wednesday by Malusi Gigaba, Minister of Finance.

Le Roux explains that while Mr Gigaba’s spending projections are virtually identical to former Finance Minister Pravin Gordhan’s February 2017 budget, his GDP growth and tax revenue projections are far more pessimistic, but arguably also far more realistic. “For some years Mr Gordhan’s fiscal projections were unrealistic and painted a false picture of the looming fiscal reality. Whether intentional or not, Mr Gigaba’s projections are significantly more pessimistic, but given the obvious weakness of the South African economy, they bear a closer resemblance to reality.”

AfriBusiness today also releases in cooperation with Russell Lamberti of ETM Macro Advisors a succinct analysis of the mini budget and its risks. The analysis is titled “Mini budget reminds us of the need to state-proof our lives” and features tips on how businesses and citizens might wish to hedge themselves against fiscal instability. Click here for the report.

Le Roux says that the theme of more blunt honesty in the mini budget is refreshing, even if Government’s proposals on how to reignite the South African economy are likely to be ineffective and even counterproductive. “We should welcome a more candid Finance Minister, even if he is unwilling to back away from the unsustainable expenditure commitments of his predecessor. At least this presents a much clearer perspective on risks. Nonetheless, Gigaba’s dirigiste proposals to boost economic performance show that Government remains stuck in the same ideological rut that it has been in for many years, where intervention and redistribution trump economic freedom and growth. It is disappointing, but not unexpected.”

Looking ahead, the AfriBusiness CEO thinks that citizens and businesses will have to consider the risk of increased taxation as the state becomes more desperate to plug the fiscal gaps. “Tax hikes would be counterproductive, but we have to be realistic about this threat given the huge deficit that Government is now scrambling to fill,” Le Roux says. “Unfortunately, Mr Gigaba sees no benefit in cutting spending, therefore it is probably a matter of which taxes will be increased and by how much.” Le Roux was however encouraged by the more realistic message conveyed about taxes. “There was a fairly clear appreciation in the mini budget that increased taxes could lead to lower compliance and that it could hurt the economy and therefore be counterproductive. AfriBusiness encourages the Finance Minister to follow this line of reasoning to its logical conclusion and to consider the tremendous economic benefits of cutting taxes and Government spending and releasing tens or even hundreds of billions of rand back to work to truly grow the economy.”