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Core services shrinkage in budget will harm the poor, MPs told

- Michael Sachs

Civil society organisations criticise what they say is an austerity budget

The “shock” contraction in government consumption spending in 2023/2024 is the largest ever in a single year, Wits University adjunct professor Michael Sachs says.

Non-interest government spending will fall dramatically from 25.5% of GDP in 2022 to 24.1% in 2023. Government consumption spending represents about 20% of GDP, so any reduction affects economic growth.

Sachs’s views, expressed during public hearings on the 2023/2024 budget held on Wednesday by parliament’s two finance committees, overlapped with those of civil society organisations who are unanimous in their condemnation of the 2023/2024 budget that they see as a continuation of the Treasury’s austerity fiscal policies, which harm the poor.

The Institute for Economic Justice (IEJ) noted that the “anti-poor” budget entails R162bn (the shortfall in spending after taking inflation into account) being cut from non-interest expenditure over the next three years. This is equal to a cut of 2.65% in real terms, the institute told MPs.

Sachs, who formerly headed up the Treasury’s budget office and now leads the public economy project of the Southern Centre for Inequality Studies, said the sharp contraction in government consumption expenditure will contribute to fiscal consolidation and debt stabilisation, but will mean a substantial shock to aggregate demand and lead to worsening income inequality in the country.

The Treasury is relying on private investment to offset the fall in demand and ensure economic growth of 0.9% in 2023. but this was not without risks in the current climate of multiple crises, Sachs said.

The reduction also means that there will be fewer resources for core services such as basic education, health care and criminal justice, which will be reduced significantly in 2023/2024. This will directly affect the incomes of lower middle-income individuals, mainly public servants. They will face fewer jobs and lower incomes.

Indirectly, there will be less public consumption by the poor of these core government services.

Sachs also believes the restructuring and turnaround plan envisaged in the R254bn debt relief to Eskom could prove challenging to implement.

“The increased cash transfers to Eskom could herald the permanent subsidisation of coal-fired electricity supply in SA financed out of general taxation. If it happens it will be a highly regressive fiscal move at odds with the government’s commitment to the energy transition.”

Sachs also highlighted the change in accounting practices on the part of Treasury, which wrongly excluded Eskom bailouts from spending and the deficit. “Once these two factors are taken into account the expectation of an improved fiscal outlook seems more apparent than real and we believe that the primary balance is reverting to a deficit next year. We think debt is unlikely to stabilise in the medium term.”

The IEJ stressed that budget expenditure must be used “to raise aggregate demand in the economy and grow the economy’s ability to supply goods and services with the aim of ensuring structural transformation over the medium term”.

The institute criticised the budget for providing tax relief to the well-off with no attempt being made to raise additional revenue in the context of dire social need. The cost to the fiscus of adjusting tax brackets for inflation will be R15.7bn. The corporate tax rate should be returned to 28%, it said.

The IEJ urged that all social grants should be protected against headline and food inflation with no grant being below the food poverty line of R663. It notes that the amount allocated for the social relief of distress grant falls from R44bn in 2022/2023 to R36bn in 2023/2024 with no increase to take account of inflation. If an adjustment for inflation had been made the grant would be R413. There had also been a drastic reduction in the number of grant beneficiaries to 7.5-million from the previous 10.5-million.

Budget Justice Coalition chair Motlatsi Komote emphasised that the Treasury’s “austerity fiscal framework” is not the way to alleviate poverty and unemployment. The 7.6% (about R2,000 per person) cut in per capita non-interest government expenditure in 2023/2024 would result in the erosion of public services, particularly in health and education.

Among civil society’s demands were the abandonment of policies to reduce the budget deficit and debt stabilisation, the reversal of tax relief for high-income individuals and the introduction of a wealth tax.

SA Institute of Taxation CEO Keith Engel urged caution about increasing taxes for individuals, noting that there are only about 5.2-million individual taxpayers. Only 20% — those earning R500,000 or more per year — are paying 80% of personal income tax.

PwC tax policy leader Kyle Mandy noted the Treasury’s inflation rate was below that of Stats SA so that the tax relief provided to personal income taxpayers by adjusting tax brackets over the past few budgets to take account of inflation does not fully compensate for fiscal drag. This failure is apparent throughout the tax system, he said.

This article first appeared in Business Day.

Michael Sachs is Adjunct Professor at the Southern Centre for Inequality Studies at Wits University