Mboweni’s Missed Opportunity

Mboweni’s Missed Opportunity
Minister Tito Mboweni [Photo: GCIS]

Data released on March 3rd indicates that South Africa has entered its third recession since 1994. The South African economy contracted by a startling 1.4% in the fourth quarter of 2019—a drastically larger shortfall than the 0.1% analysts had predicted, thanks in large part to the instability of the country’s electric grid as Eskom struggles to keep up with demand.

Even before the devastating GDP numbers, the stakes were high for South African Finance Minister Tito Mboweni’s February 26th budget address. South Africa’s debt has soared as Eskom and other state-owned companies have faltered, leaving Cape Town with ballooning bailout bills.

All the ratings agencies except Moody’s have downgraded the country to junk—and the lone holdout, despite Mboweni’s recent budget speech, is expected to follow suit on March 27th. The consequences of South Africa losing its investment-grade ranking could be swift and severe, with fund managers selling South African bonds en masse, the rand sinking against most major currencies and the spectre of an IMF bailout looming large.

Budget sets up a bitter fight with trade unions

Mboweni faced a Herculean task trying to stem the seemingly inevitable downgrade, but the long-awaited budget nevertheless fell short in a number of important ways. For all the minister’s talk of “structural reform,” planned changes appear out of step with the country’s current economic circumstances.

For one thing, the budget relies heavily on a proposal to cut public sector wages. It’s a scheme which has been met with widespread scepticism over whether it will actually usher in the economic growth which Mboweni is touting. According to one analyst, it shows that the “Treasury is desperately short of ideas to fix South Africa’s economic woes”—and that’s not even taking into consideration the fact that the country’s powerful trade unions are likely to derail the plan before it even gets off the ground.

The move would essentially expect public servants to pay for bailouts of the likes of South African Airways—which hasn’t turned a profit since 2011—out of their own pockets. South Africa’s powerful trade unions, unsurprisingly, have their knives out. The Public Servants Association (PSA) warned that the decision is “guaranteed to have dire consequences”. The Federation of Unions of South Africa (FEDUSA), meanwhile, has declared war on Mboweni and the rest of the government. With the country’s unions capable of mobilising hundreds of thousands of members, brinkmanship between the government and public sector workers could forecast some rocky years ahead.

No plan to staunch the flow of cash to failing state-owned giants

Worse still, Mboweni has failed to offer a clear enough plan for restructuring state behemoths like Eskom and SAA to ensure they will not require further taxpayer-funded lifelines. The Finance Minister’s opacity is particularly problematic given the fact that last year’s bailouts seem to be dragging on 2020. In order to keep the national airline afloat, the National Treasury is already expected to have to inject even more than the R23bn outlined in Mboweni’s budget speech.

According to some pundits, Mboweni’s move to shrink vital parts of the public sector in the name of efficiency is a step in the wrong direction. Key departments in health and education will be hit hard by the latest round of cuts, while under-resourcing is set to threaten existing efforts to tackle corruption and other irregularities. South Africa’s economy cannot be kickstarted, many argue, if essential public sector workers are the first to be led to the chopping block.

Puzzling lack of focus on efficiently collecting existing taxes

Meanwhile, while consumers were no doubt relieved at Mboweni’s surprise decision not to hike value-added tax (VAT), pay-as-you-earn (PAYE) or other personal income taxes, last week’s budget was disappointingly light on plans to improve the collection of South Africa’s existing taxes.

For example, the country’s 2018 and 2019 budgets contained entire sections on the implementation of tracking and tracing goods such as tobacco products in a bid to tackle tax evasion. In this year’s budget paper, however, this section was nowhere to be found, meaning that Mboweni is—at best—neglecting what could be a very valuable source of revenue.

Well-designed independent systems to monitor taxable goods all along their supply chains have proven extremely effective in other countries. Kenya turned to high-tech excise stamps in 2013—first on tobacco and alcohol, though the scheme known as the Excisable Goods Management System (EGMS) has since been extended to other products including bottled water and juice. The system has enabled Nairobi to seize hundreds of thousands of illicit cigarettes and increase its excise collection by more than half.

As a party to the World Health Organisation’s Protocol to Eliminate Illicit Trade in Tobacco Products, South Africa was expected to introduce a similar system to replace its ineffective “diamond” embedded marking on tobacco products. Such a track-and-trace system could be a boon for South African tax collectors: the market share of illicit tobacco is thought to be as high as 40%. Major tobacco companies, however, are attempting to derail any attempt to tackle tax evasion in the industry—unsurprisingly, since they themselves benefit from the underground tobacco trade.

The industry’s efforts seem to have paid dividends—South Africa’s planned tender to implement a track-and-trace system has run into delays, while its absence from the 2020 budget is worrying. Of course, if South Africa finds itself reaching out to the IMF for support in future, the Fund will almost certainly demand remedial measures (such as anti-illicit trade systems) to ensure tax revenues are being optimally collected.

With its economy in such dire straits, South Africa can’t afford any further impediments to a system which could rake in sorely needed revenue. The confirmation that the country has sunk into its second recession in two years only validates fears that Mboweni’s budget failed to deliver on the significant reforms needed to turn South Africa’s economy around. The government simply cannot turn a blind eye to any avenues to more efficiently collect tax revenues, or to continue to sink cash into Eskom even as it fails to keep the grid online, or to pin its budgetary hopes on a plan likely to be scuttled by trade unions.