tag:theconversation.com,2011:/us/topics/2018-budget-50164/articles2018 Budget – The Conversation2018-09-06T03:26:43Ztag:theconversation.com,2011:article/1027122018-09-06T03:26:43Z2018-09-06T03:26:43ZMorrison’s return to surplus built on the back of higher tax – Parliamentary Budget Office<p>First, the good news. The Parliamentary Budget Office’s latest <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Publications/Research_reports/Medium-term_budget_projections">medium-term budget projections</a> provide
independent reassurance that the government’s personal income tax cuts, announced in the May budget and passed through parliament in June, can be funded without pushing the budget back into deficit. </p>
<p>But they also sound warnings about the downside risks from weaker-than-assumed economic or wages growth, and from any relaxation of the spending restraint
that successive governments have maintained since 2012.</p>
<h2>More income tax</h2>
<p>The PBO projects the federal government’s “underlying” cash balance to improve from 0.8% of GDP in 2021-22, the last year of the latest budget’s forward estimates period, to 1.3% of GDP in 2028-29.</p>
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Read more:
<a href="https://theconversation.com/budget-policy-check-does-australia-need-personal-income-tax-cuts-94500">Budget policy check: does Australia need personal income tax cuts?</a>
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<p>That’s after allowing for the revenue forgone by the tax cuts. Without these, and in the absence of any other spending or revenue measures, the surplus would have reached 3.7% of GDP (my calculation, not the PBO’s), largely on the back of the “bracket creep” that would have occurred without some form of personal income tax cuts between now and then. </p>
<p>Even so, there’s an awful lot of bracket creep.</p>
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<a href="https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=477&fit=crop&dpr=1 754w, https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=477&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/235133/original/file-20180906-191841-1p0err4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=477&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Projected change in average income tax rates by quintile.</span>
<span class="attribution"><a class="source" href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Publications/Research_reports/Medium-term_budget_projections">Parliamentary Budget Office, 2018-19 Budget: Medium-Term Projections (September 2018)</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>The average tax rate across all taxpayers is projected to increase from 22.9% to 25.2% – that is, by 2.3 percentage points. For taxpayers in the second and middle quintiles (the middle fifth and the second-to-bottom fifth) it’s even worse. They will see their average rates rise by more than 4 percentage points. The average tax rate for those in the top and bottom quintiles will climb by less than 1 percentage point.</p>
<p>The PBO’s projections allow for only slight additional relief; small reductions in 2027-28 and 2028-29, worth about 0.4% of GDP, to ensure tax receipts remain within the government’s “cap” of 23.9% of GDP in the final two years of the 10-year projection period.</p>
<h2>A helpful backdown on company tax</h2>
<p>The PBO’s forecasts don’t allow for the government’s recent decision to abandon
the previously proposed cut in the corporate tax rate for companies with annual turnover exceeding $50 million, which it had been unable to pass through the Senate. That would add the equivalent of almost 0.5 of a percentage point of GDP to the surplus by 2028-29, unless offset by other measures (which it probably will be).</p>
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Read more:
<a href="https://theconversation.com/the-full-story-on-company-tax-cuts-and-your-hip-pocket-59458">The full story on company tax cuts and your hip pocket</a>
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<p>By law, the PBO is required to use the same economic assumptions in framing its medium-term projections as those used in the most recent federal budget.</p>
<h2>Wishful economic thinking</h2>
<p>These requirements mean the projections are conditioned on, among other things, “above-trend economic growth for much of the period” and “a return to close to trend wages growth” by 2021-22. </p>
<p>This week’s national accounts data lend some near-term support to the first of these assumptions, but they (and other data) cast further doubt on the likelihood of wages growth returning to trend in line with the budget assumptions. </p>
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Read more:
<a href="https://theconversation.com/this-is-what-policymakers-can-and-cant-do-about-low-wage-growth-101025">This is what policymakers can and can't do about low wage growth</a>
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<p>The PBO notes that, as a direct result of the government’s personal income tax plan, any weakness in future tax receipts flowing from “weaker economic circumstances” will “flow through directly to the budget bottom line”.</p>
<h2>A decade of tight spending</h2>
<p>The report highlights the importance of policy decisions in stemming the flow of new spending decisions and tightening eligibility for benefit payments since 2012. </p>
<p>Much of the impact of these will show up more clearly over the next decade. Apart from three areas – the National Disability Insurance Scheme (NDIS), aged care and defence, on which spending is projected to rise by a little over 1 percentage point of GDP over the next decade – other government spending is projected to
fall by around 2 percentage points of GDP between 2017-18 and 2028-29.</p>
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Read more:
<a href="https://theconversation.com/government-spending-explained-in-10-charts-from-howard-to-turnbull-77158">Government spending explained in 10 charts; from Howard to Turnbull</a>
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<p>The PBO notes that “the spending restraint seen over the past few years … may be
increasingly difficult to maintain with an improving budget outlook”. </p>
<p>(Unintentionally) highlighting that risk, the PBO explicitly notes that the proposed further increase in the pension eligibility age to 70 between 2023 and 2035 – which the government abandoned this week – was “projected to have a significant impact on Age Pension spending … over the next decade”.</p><img src="https://counter.theconversation.com/content/102712/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saul Eslake is an unpaid member of the Parliamentary Budget Office's Advisory Panel </span></em></p>The promised budget surplus depends on everything going right, and much more income tax says the Parliamentary Budget Office.Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/917132018-03-27T10:43:46Z2018-03-27T10:43:46ZCongress left a little something for waiters and dishwashers in its $1.3 trillion budget<figure><img src="https://images.theconversation.com/files/212052/original/file-20180326-188601-bjsgol.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Lawmakers have been generous. </span> <span class="attribution"><span class="source">Trudy Wilkerson/Shutterstock.com</span></span></figcaption></figure><p>While federal workers were breathing a sigh of relief that <a href="https://www.nytimes.com/2018/03/22/us/politics/house-passes-spending-bill.html">Congress managed to avoid</a> a government shutdown, another group of workers also had reason to cheer. That’s because hidden deep in the US$1.3 trillion budget deal that President Donald Trump signed on March 23 was <a href="https://www.nytimes.com/2018/03/23/business/economy/tipping-workers.html">a measure</a> preventing his administration from changing the law to allow employers to take workers’ tips. </p>
<p>As an expert in workers’ rights, I believe the measure also has the potential to reduce an inequality that has long existed in the restaurant industry.</p>
<h2>The law on tips</h2>
<p>The federal minimum wage is $7.25 an hour. Tipped employees, however, can earn as little as $2.13 if they make up the difference between that and the minimum wage – or more – in tips. </p>
<p>This came to be known as a “tip credit” and <a href="https://www.govtrack.us/congress/bills/93/hr12677">allows</a> employers to pay subminimum wages, as long as they let the worker keep all of his or her tips. </p>
<p>In 2011, the Obama administration <a href="https://www.federalregister.gov/documents/2011/04/05/2011-6749/updating-regulations-issued-under-the-fair-labor-standards-act">promulgated regulations</a> stating that employees must be allowed to keep all their tips, regardless of whether they are paid the tipped or full minimum wage. The only exception was in cases of a tip pool that distributed tips among employees who “customarily and regularly receive tips.” </p>
<p>Despite this rule, tip stealing is widespread in the restaurant industry. <a href="http://www.nelp.org/publication/broken-laws-unprotected-workers-violations-of-employment-and-labor-laws-in-americas-cities/">A 2009 survey</a> of low-wage workers in New York, Chicago and Los Angeles by the National Employment Law Project, a national policy organization, found that 12 percent of survey participants who received tips had their tips stolen by their employer in violation of current law. </p>
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<img alt="" src="https://images.theconversation.com/files/212053/original/file-20180326-188604-3juqjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212053/original/file-20180326-188604-3juqjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=389&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212053/original/file-20180326-188604-3juqjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=389&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212053/original/file-20180326-188604-3juqjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=389&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212053/original/file-20180326-188604-3juqjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=489&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212053/original/file-20180326-188604-3juqjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=489&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212053/original/file-20180326-188604-3juqjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=489&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Some restaurants pool tips to distribute them more evenly among staff.</span>
<span class="attribution"><span class="source">AP Photo/Ted S. Warren</span></span>
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<h2>Changing the rules</h2>
<p>The Trump administration was poised to make this problem worse by repealing the regulation that required that employees be permitted to keep their tips, except pursuant to a legal tip pool.</p>
<p>In December, the Department of Labor <a href="https://www.eater.com/2017/12/5/16708374/tipping-laws-trump-department-of-labor-changes">announced</a> a proposed rule change that would have allowed employers to do whatever they wanted with tips earned by employees, including keep them, as long as the employees made at least $7.25 per hour. </p>
<p>The administration claimed that this rule change would have allowed employers to distribute tips more equitably among their employees. For instance, it would have permitted dishwashers and other kitchen staff to be a part of a tip pool, something previously not permitted. </p>
<p>Labor advocates <a href="http://www.newsweek.com/trump-department-labor-tipping-wage-theft-799683">cried foul</a>, arguing that the change would have resulted in a massive wealth transfer from workers to employers. <a href="https://www.epi.org/publication/employers-would-pocket-workers-tips-under-trump-administrations-proposed-tip-stealing-rule/">An analysis</a> by the Economic Policy Institute estimated that the rule would have cost workers at least $5.8 billion per year in lost income. </p>
<p><a href="https://bnanews.bna.com/daily-labor-report/labor-dept-ditches-data-on-worker-tips-retained-by-businesses">A Department of Labor analysis</a> that was initially kept from the public came to similar conclusions.</p>
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<img alt="" src="https://images.theconversation.com/files/212045/original/file-20180326-188607-v39b7o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212045/original/file-20180326-188607-v39b7o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212045/original/file-20180326-188607-v39b7o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212045/original/file-20180326-188607-v39b7o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212045/original/file-20180326-188607-v39b7o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212045/original/file-20180326-188607-v39b7o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212045/original/file-20180326-188607-v39b7o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Until now, ‘back of the house’ employees such as dishwashers weren’t allowed to share in tip pools.</span>
<span class="attribution"><span class="source">AP Photo/Tony Gutierrez</span></span>
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<h2>Restaurant inequality</h2>
<p>Whether or not the administration was being honest about its real motivations, the Department of Labor was right to draw attention to a form of structural inequality that exists in the restaurant industry. </p>
<p>Tipped workers typically make <a href="http://rocunited.org/wp-content/uploads/2014/10/REPORT_The-Great-Service-Divide2.pdf">two to four times</a> that of non-tipped workers, even when their formal salary is just $2.13 an hour. The ones who earn gratuities, such as waiters, bussers and food runners, are called “front of the house” employees. Meanwhile, “back of the house” employees, like cooks, dishwashers and other kitchen staff, don’t earn tips. </p>
<p>Because racial minorities are more likely to be employed in non-tipped positions, this income inequality results in a stark racial divide as well. A <a href="http://rocunited.org/2011/08/restaurants-and-race-discrimination-and-disparity-in-the-food-service-sector/">study</a> by the Restaurant Opportunity Centers United, a <a href="http://rocunited.org/">national restaurant worker advocacy group</a>, found that white food service workers earn $3 more per hour on average than workers of color, in part because of the tips that white workers are more likely to earn. </p>
<p>As long as federal regulations forbade tip pools to include these back of the house employees, this structural inequality was likely to persist.</p>
<h2>What the budget deal does</h2>
<p>The measure passed as part of the budget deal addressed both the concern about employers’ taking workers tips and the structural pay gap. </p>
<p><a href="https://www.gpo.gov/fdsys/pkg/CPRT-115HPRT29374/pdf/CPRT-115HPRT29374.pdf">It states</a> that under no circumstances can employers or managers take workers’ tips. But it also suspends the Obama regulation that prohibited tip pooling with back of the house employees as long as all employees earn at least $7.25 per hour. </p>
<p>In other words, this will allow employers to distribute tips more fairly and better compensate their lowest-paid employees, who often work in back, while preventing owners from using the rule to line their own pockets. </p>
<p>Congress rarely passes legislation that is win-win, but in this situation it has managed to do just that.</p><img src="https://counter.theconversation.com/content/91713/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicole Hallett directs the Community Justice Clinic, which represents low-wage workers on issues related to, among other things, tip-stealing. </span></em></p>The budget bill just signed into law by the president will both make it harder for restaurants to take worker tips while reducing a form of inequality rife in the industry.Nicole Hallett, Assistant Clinical Professor of Law, University at BuffaloLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922912018-02-23T09:17:08Z2018-02-23T09:17:08ZUnpacking the latest tax hikes in South Africa<figure><img src="https://images.theconversation.com/files/207625/original/file-20180223-108110-3bswct.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 budget</a> seemed to be all about tax hikes. The most significant was the first increase in Value Added Tax (VAT) since 1993 from 14% to 15%. Sibonelo Radebe asked Muneer Hassan to make sense of the tax increases.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>The 2018 budget was predictable in that it was similar to previous years – expenditure rose, funded by an increase in taxation. What was notably different in this year’s budget is that the issue of fruitless and wasteful expenditure was in the spotlight. One new measure being proposed on this front is that state owned entities will be denied tax deductions for expenditure or losses that are classified as fruitless and wasteful. </p>
<p>To minimise the annual increase in budgeted expenditure, a reduction in cabinet expenses amounting to R85 billion over the next three years is proposed. This is a positive proposal which shows a serious intent by government to cut expenses where possible. It can also be taken as a hint that not only a cabinet reshuffle, but also a possible reduction in the cabinet number count, is on the cards.</p>
<p><strong>What is your impression around the key tax announcements?</strong></p>
<p>I was not surprised by the one percentage point increase in the VAT rate. South Africa is in a way catching up with other countries in the Organisation of Economic Cooperation and Development (OECD). Their average VAT rate is <a href="http://www.oecd.org/tax/tax-policy/tax-database.htm#VATTables">around 19%</a>. And most African countries have a <a href="https://www.crowehorwath.net/uploadedfiles/mu/additional-content/home/africa%20vat%20guide%202016.pdf">higher than 14%</a> VAT rate. </p>
<p>It was also not surprising that the VAT rate was raised rather than personal income tax. South Africa has seen a decline in collections from personal income taxes over the past few years. This has been attributed to job losses, lower bonus payments and moderate wage settlements. This suggests that the personal income tax front may have reached a ceiling.</p>
<p>The VAT rate increase is further justified in that 30% of the wealthy taxpayers <a href="http://www.treasury.gov.za/documents/national%20budget/2018/review/Chapter%204.pdf">contribute 85%</a> of total VAT collections. </p>
<p>And to shield those on the bread line from the increase, social grants were adjusted by more than inflation. </p>
<p>The concept of multi-VAT rate, differentiated rates for different items, was on the cards. But the idea was dropped because it was considered unfeasible – it would need additional enforcement to work properly and there is also a view that it could have created legal uncertainty. </p>
<p>Instead of multi-VAT rates, the budget proposed an increase in duties on luxury goods such as cars, smart phones and so on through the current <em>ad valorem</em> excise duties. These items are largely consumed by wealthier people.</p>
<p><strong>What are the main drivers of these tax developments?</strong></p>
<p>The main driver was the need to fund the tax revenue shortfall which stands at R48.2 billion for the current (2017/18) financial year, slightly lower than the projected amount of R50.8 billion. The reason for the shortfall is due to lower than expected tax revenue collections, which is directly affected by the employment numbers, company results and consumer spending. </p>
<p>In addition government is struggling with ever increasing debt-service costs due to slowing economic growth and against rising social expenditure needs. The budgeted debt-service costs for 2018/19 is R180 billion. Goverment’s borrowing space has shrunk. Sovereign debt has skyrocketed towards unsustainable levels over the past few years. </p>
<p>The tax policy proposals are designed to raise R36 billion in additional revenue. The increase in the VAT rate will bring in an extra R22 billion.</p>
<p><strong>From a tax perspective, were there any missed opportunities?</strong></p>
<p>I expected more relief for small businesses particularly on the ease of administration for these taxpayers. Small businesses of today are big businesses of tomorrow. Unlocking the potential of small business is therefore a vital stimulus to the growth rate.</p>
<p><strong>Any other thoughts?</strong></p>
<p>I think this budget was largely about increasing taxes through indirect taxes. The increases in VAT, fuel levy, environmental taxes, <em>ad valorem</em> excise duties are all indirect taxes. This leads to the tax burden being placed ultimately on the end consumer. In my opinion this is the easiest way to increase taxes without introducing additional administrative costs.</p><img src="https://counter.theconversation.com/content/92291/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Muneer Hassan owns shares in MHTax Consulting (Pty) Ltd. </span></em></p>A revenue shortfall of about R50 billion has pushed the South African government to hike Value Added Tax (VAT) among other taxes.Muneer Hassan, Senior Lecturer in Tax, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922452018-02-22T11:25:10Z2018-02-22T11:25:10ZEfforts to get South Africa’s economy moving are no more than a patch up job<figure><img src="https://images.theconversation.com/files/207463/original/file-20180222-152372-x8679p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African finance minister Malusi Gigaba could have done better in his 2018 budget speech.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>Its obvious that the South African government approached the <a href="http://www.treasury.gov.za/">2018 budget</a> from an extremely tight spot and with limited options. The country has been staring at the perfect storm of low economic growth and widening fiscal deficits set against huge expectations and needs. These include <a href="https://www.ujuh.co.za/south-africa-relies-on-new-taxes-to-fund-fee-free-higher-education/">fee-free higher education</a> for poor students, troubled state-owned enterprises and a growing base of the unemployed.</p>
<p>The saving grace may have been the recent <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">change in presidency</a> from the disastrous Jacob Zuma to the promising Cyril Ramaphosa. The new president has triggered a wave of optimism and there are signs that the economy is <a href="https://citizen.co.za/business/business-news/1829217/sas-economic-growth-forecast-revised-upward/">picking up</a>. This will be needed if Treasury is to find a way of closing a revenue gap of R48.2bn.</p>
<p>The focus by Malusi Gigaba, the minister of finance, on free education, developing industrialists and small to medium sized enterprises are to be welcomed. But one gets the sense that without the right policies in place, this is just more of the same. </p>
<p>Assuming that government is able to achieve the expenditure reduction of R85 billion, fund the R57 billion earmarked for higher education via increased <a href="https://theconversation.com/south-africas-finance-minister-played-the-tax-cards-he-had-left-wealth-and-vat-92230">Value Added Tax</a> (VAT) and marginal adjustments to personal income tax, the question remains; has it addressed the real reasons why the country has been limping along. It all sounds like a patch up job to me.</p>
<p>The increase in VAT from 14% to 15% is bad news, despite the promised offsets through social grants. VAT is generally known to be <a href="https://www.ujuh.co.za/south-africas-tax-system-and-the-reform-agenda-for-2015-and-beyond/">a regressive tax</a> which means it tends to hit the poor people the hardest.</p>
<p>On top of this, the budget just didn’t go far enough. Perhaps the finance minister was caught up in the euphoria of Ramaphosa’s widely welcomed <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a>. Gigaba’s speech didn’t do enough to highlight the consequences of not doing what needs to be done. He had a great opportunity to set the path, but there wasn’t an integrated outline as to what is needed, and how the changes proposed will be implemented in a way that makes sure they complement each other. </p>
<p>He had the chance to set the vision, but didn’t.</p>
<h2>Thin on detail</h2>
<p>The budget is very thin on detail. The power utility Eskom is clearly a great concern as reference to this was highlighted quite early on in the budget speech. The minister said:</p>
<blockquote>
<p>we have demonstrated our resolve by strengthening Eskom’s board and management with highly capable, ethical and credible leadership. </p>
</blockquote>
<p>Other than a brief mention of South African Airways (SAA), Gigaba made no reference to other stressed state owned enterprises such Passenger Rail Agency of South Africa and Denel. I was expecting more detail on how government plans to sort out the state owned enterprises mess.</p>
<p>The debt situation is frightening. The debt-service cost projections have gone up from R163.155 million in 2017/18 to R213.859 million in 2020/21. Even though he acknowledged that government debt is on an unsustainable path, he didn’t provide a clear outline about how the stabilisation of gross debt-to-GDP at 56.2% of GDP in 2022/23 will be achieved. This is just a case of kicking the can down the road.</p>
<h2>The fate of state owned enterprises</h2>
<p>Gigaba made a bold statement when he said:</p>
<blockquote>
<p>State-owned enterprises are expected to fund their own operations. </p>
</blockquote>
<p>The only clue as to how this will be achieved is that government would help them develop robust turnaround plans. </p>
<p>Gigaba also mentioned that non-core assets could be sold, strategic equity partners brought in or possible injections of direct capital. </p>
<p>This is all well and good. But the minster wasn’t clear about the time frame, who will drive the process or how it will be done. The lack of detail doesn’t inspire confidence that there is real political will to address the dire situation of state owned enterprises. </p>
<p>Gigaba did touch on the systemic issues like the unacceptably high levels of corruption. But he did not do so credibly enough. He didn’t demonstrate loudly and clearly that the government wouldn’t tolerate any more <a href="https://www.ujuh.co.za/state-of-capture-public-protectors-report/">transgressions</a> in the running of public funds. </p>
<p>The fact that he has a <a href="https://citizen.co.za/news/south-africa/1789778/gigaba-the-catalyst-behind-a-multibillion-rand-civil-claim-against-eskom-zuma-guptas/">cloud hanging over</a> his head does not help the situation. One can’t help but wonder if his proposals can be taken seriously. </p>
<p>What people want to see is the minster drawing a line in the sand and making it abundantly clear that it can no longer be crossed. As the person who controls the public purse, this message should have been loud and clear.</p>
<h2>Next steps</h2>
<p>Ramaphosa has the opportunity to assemble the most respected cabinet this country has ever known. The various summits that he is calling for – such as the one on jobs – and the social compact he’s intent on securing are absolutely essential to kick start South Africa on a growth path that is able to realise inclusive economy and socioeconomic transformation.</p><img src="https://counter.theconversation.com/content/92245/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Owen Skae does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 2018 budget does not go far enough. Perhaps finance minister, Malusi Gigaba was caught up in the euphoria of the widely welcomed state of the nation address by Cyril Ramaphosa.Owen Skae, Associate Professor and Director of Rhodes Business School, Rhodes UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922232018-02-21T16:55:44Z2018-02-21T16:55:44ZNo more mercy for bad behaviour at South Africa’s state owned companies<figure><img src="https://images.theconversation.com/files/207312/original/file-20180221-132680-xnoxi4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africa's Finance Minister Malusi Gigaba arrives to deliver his budget address.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 national budget</a> was presented amid growing concern about the financial sustainability of key state owned enterprises such as the power utility Eskom and South African Airways. Sibonelo Radebe asked Misheck Mutize and Sean Gossel to set out what the budget means for them.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>Coming on the back of the <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a> presented by the new President Cyril Ramaphosa, the 2018 national budget has renewed hope about the future of the country’s economy. Combined with the pledge by Ramaphosa to root out the ills bedevilling state owned enterprises, there is optimism that South Africa’s economy is turning the corner.</p>
<p>There were signs of the rebound from the numbers presented by the minister – even though there’s still huge weakness in the economy. Last year’s economic growth projection has been revised, up from 0.7% to 1% and growth in 2018 is projected at 1.5% rising to 2.1% 2020. Of course the country needs much more robust growth than this. The hope is that things will improve with the interventions promised by the new president.</p>
<p>It was a tough budget, especially for the poor. But the tax hikes and other measures are necessary given the need to narrow a R42 billion revenue shortfall, which was widened by the need for a funding solution for fee free higher education. </p>
<p>Overall the budget presented a solid step towards arresting the fiscal deficit and stabilising government debt. Fiscal prudence is painful. But it’s necessary to save the country from further downgrades, and from sliding deeper into debt. </p>
<p><strong>What do you think about the treatment of state owned enterprises?</strong></p>
<p>Finance minister Malusi Gigaba underscored the commitment to dealing with patronage, corruption and incompetence in state owned enterprises. (This is rather <a href="https://www.news24.com/SouthAfrica/News/is-gigaba-mr-state-capture-20170528-2">ironic</a> as he has been fingered as one of the architects of state capture as the opposition vocally pointed out before the speech got underway). Nevertheless, this must be commended. The looting and mismanagement has caused a great deal of damage to the economy as well as business confidence.</p>
<p>The message is that there will be no mercy for misbehaviour in this space. Time has also run out for those who justified mediocrity in parastatals. Gigaba’s statement that state-owned companies are expected to fund their own operations must also be welcomed. Although similar calls have been made in the past, this time there may be political will.</p>
<p>This means that the government’s limited resources can now be allocated to other more important things. Hopefully the emphasis will shift towards finding long-term solutions to the country’s ills. </p>
<p><strong>What must happen to get state owned enterprises right?</strong></p>
<p>It is refreshing that the new president has indicated his commitment to appointing qualified and experienced people to lead state owned enterprises. This is a welcome substitute for the disastrous policy of cadre deployment – the practice of appointing people to state owned enterprises largely for their political connections.</p>
<p>But it’s also time the government actively reconsidered its interest in state owned enterprises. The cost of maintaining ownership has become too high. Over the past 24 years state owned monopolies have been the site of gross inefficiencies and high social costs which in turn have hampered the economy’s performance. The time is ripe for the government to begin unpacking monoliths such as Eskom, Transnet and the Passenger Rail Agency of South Africa in preparation for partial privatisation or public listings on the stock exchange. </p>
<p>The options would be to either partially privatise the entities, or to open up the space for private players to buy equity stakes. Government might in fact be considering these options given Gigaba’s comment that: </p>
<blockquote>
<p>In the coming year, government may be required to provide financial support to several state owned enterprises which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections.</p>
</blockquote>
<p>It is good that the minister mentioned these refinancing options. But there’s still talk of government support and guarantees for several state owned enterprises. </p>
<p><strong>What general advice would you give to the new administration following this budget?</strong></p>
<p>As the government goes about meeting the spending cuts it announced (by R85.7 billion) over the next three years and increasing revenue by R36 billion this year, it urgently needs to wean state owned enterprises from the fiscus. Opening the public sector to participation by private players would be the optimal way to go about this. </p>
<p>Allowing these enterprises to continue operating as monopolies in key sectors will simply allow inefficiencies and market distortions to continue. We would argue that the unions and politicians that have campaigned against privatisation have exaggerated the negative impact on the poor. <a href="https://hbr.org/1991/11/does-privatization-serve-the-public-interest">Evidence</a> from other countries suggests that introducing private ownership doesn’t necessarily lead to massive job losses nor expensive services. </p>
<p>The new administration should depoliticise the issue and face the reality that state owned enterprises need an immediate and realistic response to save both the economy and the fiscus. Without that, the government will not be able to wean them from guarantees and bailouts, and their failure will be eminent.</p>
<p>We would also urge the government to follow up on the promise to hold corrupt public servants to account and to ensure tender processes aren’t abused by closing loopholes in public procurement.</p><img src="https://counter.theconversation.com/content/92223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sean Gossel receives funding from the University of Cape Town.</span></em></p><p class="fine-print"><em><span>Misheck Mutize does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s 2018 national budget makes it clear that the slumber and corruption that has hampered state owned enterprises must come to an end.Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape TownMisheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.