JOHANNESBURG — Government has been overspending at a rapid rate ever since President Jacob Zuma took office. Today, the country’s debt-to-GDP ratio is heading further north, well past the 50% mark, as the Zuma era continues in full force. Like a household, if South Africa’s overspending continues, the country will be in serious trouble and will have to bring its begging bowl to the IMF. And the IMF will have very particular demands before granting any kind of bailout to the country. As John Maynard highlights below, South Africa also needs to create jobs as more and more graduates flood the market. More business friendly policies are needed, but until that happens, expect South Africa high youth unemployment rate to persist. – Gareth van Zyl

By John Maynard*

In today’s blog, we take a look at whether the South African government spending is growing faster than the taxes collected to fund their spending. A slowing economy with retrenchments and lower levels of spending being the order of the day, will make it a lot harder for the South African Revenue Service (SARS) to collect the tax revenues required to fund government’s ever increasing spending programs aimed at addressing various ills in the South African economy and society at large.

SA’s revenue sources

Sources of revenue for government?

So what are the South African government’s main sources of revenue? Personal Income Tax (PIT), Corporate Income Tax (CIT) and Value Added Tax (VAT), makes up the bulk of taxes collected by the South African government. The graphic below shows the percentage each group contributes to total taxes collected.

The proportions above is as reported by SARS for the end of the 2015/2016 tax year. PIT being the single biggest source of tax revenue, with VAT coming in a distant second but ahead of CIT. With a ever increasing unemployment rate, one would expect SARS would be collecting a lot less in terms of PIT in the next tax year?

Well that is a reasonable assumption to make, but higher levels of unemployment does not mean more and more people are losing their jobs and therefore government cannot collect PIT from them. In actual fact, while the unemployment rate as increased, so has the number of people employed in South Africa (and more employed people means greater number of people eligible to be taxed and thus more tax revenues for government). The graphic below shows the unemployment rate and the number of people employed in South Africa.

From the graphic above one can see that while the unemployment rate has increased (the red bars) from the levels recorded in 2008, so has the number of employed people. So why the increase in the unemployment rate then when the number of employed people are increasing too? Well the short answer is more people (mostly students who just finished school or tertiary education) are entering the jobs market than jobs are created. And this is the main cause of the increasing unemployment rate. The economy is not creating jobs fast enough to absorb those who just finished school or tertiary training).

So while the unemployment rate has increased by 7.4% from 24.9% in 2010 to 26.7% in 2016, the number of people employed increased by 14.5% or 1.99million people over the same time period and this has aided government in collecting more in tax revenues over time. A lot of noise out there has suggested government’s tax revenues will fall due to large scale retrenchments etc, but the numbers debunk that. Where government might see a drop in taxes collected is in VAT. As consumers tighten the belt and spend less (especially on big ticket items such as cars), government’s revenue collected via VAT will start to feel the pinch. The same can be said with CIT, as profit’s start to decline due to lower levels of spending, so will the taxes collected via CIT. Government will have no choice but to keep milking the rich (as we mentioned in this article).

So by how much has tax revenues collected and government spending gone up from 2009/2010 to 2016? And what is predicted by government and SARS with regards to tax collections and spending for 2016/2017? The bar chart below shows revenue collected and total expenditure:

As can be seen from the graphic South Africa has had a budget deficit every single tax year from 2009/2010. The average budget deficit since 2009/2010 up to the forecasted year of 2016/2017 is R158billion a year. From the 2009/2010 tax year up to forecasted year of 2016/2017 the total deficit amounts to R1.267trillion. Essentially over this time period from 2009/2010 up to end of 2016/2017 government would have spent R1.267trillion more than what they collected in taxes over the same period. That is a staggering amount of money that is being spent that the government does not have (to put it into perspective, that amount equals 5 150 Nkandla upgrades for our dear president).

In order to pay for all their spending, government has to borrow money. SA’s debt costs have ballooned from 2009/2010 when it was R57billion, to a predicted R147.7billion by end of 2016/2017 (that is a 159% increase in SA’s government debt costs from 2009/2010 to end of 2016/2017). As a percentage of South Africa’s GDP, SA’s government debt costs were about 2.3% of GDP, that will sit at 3.4% of GDP by end 2016/2017. Clearly showing the growing problem SA’s budget deficit is creating.

The debt costs, which is essentially interest the South African government is paying to those they are borrowing from, now amounts to over 3% of South Africa’s total economy. That interest is money that should be used to provide essential services to the poor, improve healthcare, education, housing, infrastructure etc. Instead government’s continued spending above their means (I.e. spending more than taxes they are collecting) has lead to government spending billions upon billions in repaying debt. This is unsustainable and if this trend is not arrested and reversed soon, the consequences for South Africa would be dire. Ratings agencies have already taken steps to warn investors about this and two of the three big ratings agencies rate South Africa’s investment grade as “Junk”. See the Ratings history for South Africa below.

South Africa’s government cannot continue to spend more than what they earn. Debt (and its servicing costs) is like an anchor to a ship. It holds the ship back when it wants to move forward. Well the same applies to a country. A country with so much debt and such large debt repayments will be held back from reaching its full potential, as money that is being spent to repay debt, could be spent on improving the lives of all it’s citizens.

John Maynard is the nom de plume of an independent economist who is obsessed with official statistics – and uses these facts to blast through misleading narrative and propaganda. For more of his unique insights click here.

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