''Downgrade will be a disaster for SA''If South Africa is downgraded to a credit rating of ‘junk’, the country will fall deeper into the debt that fostered these concerns to begin with. Davis Tax Committee foresees worst-case scenario Another downgrade of South Africa’s investment credit rating by the ratings agencies will be a disaster for the economy, and everything possible should be done to avert it, says Judge Dennis Davis, chairman of the Davis Tax Committee.Speaking at the annual Tax Indaba in Midrand, Davis on Monday said a downgrade would be a disaster of “manifold proportions” and the effect will be felt most by the poor, who deserve a better life.
A downgrade means an increase in the interest cost for government to service its debt. The current interest cost on debt is R147 billion a year.
This represents 11.4% of expenditure, and is the single biggest expenditure item in the budget, followed closely by the wage bill, which represents 7.4% of expenditure. South Africa’s credit is a notch above junk.
“I cannot overestimate the disaster that will engulf our fiscal and revenue calculations and our economy as a whole if we are downgraded. If we are downgraded and we continue as we are, we are clearly not going to get enough revenue to be able to close the gap between revenue and expenditure,” warns Davis.
South Africa’s revenue collection remains buoyant, despite a decline in economic growth. However Tom Moyane, commissioner of the South African Revenue Service (SARS), says the 2016 revenue target is at risk due to the bad economic performance.
Some of the risks facing SARS include the volatility of the rand, the threat of a downgrade that will affect debt repayments, and the rising level of unemployment and a possible growth rate below 0%.
SARS has been set a revenue collection target of R1.74 trillion.
Personal tax
Michael Sachs, head of the budget office at National Treasury, says personal income tax has been driving the buoyancy, mainly due to above-inflation wage settlements.
Government’s wage settlement for its 1.2 million employees wiped out the R60 billion reserved for unexpected expenses. It is important to reduce the number of public servants, says Sachs.
Economic growth has been declining and is now expected to be flat this year. A revised forecast will be announced in October during the Medium Term Budget Policy Statement.
Sachs says global growth of 3% to 4% has been underpinned by government stimulus programmes driven by central banks. Sachs warns these growth rates might not be sustainable, given the context of high debt in the public and private sectors.
“The effect is that South Africa can be hit by further global shocks as these huge debt overhangs start to unravel. The dangers and vulnerabilities we face are high, because if another global shock hits us, the fiscal space available to South Africa will be very limited.”
In addition, South Africa’s long-term economic growth rates are now in question. During the economic boom in the mid-2000s, the growth rate was around 4% and most thought that could be sustained and it made sense to maintain the spending in line with what we thought our revenue income would be.
“Unfortunately, very few of us foresaw the global crisis in 2009 and few realised that it would not only be a temporary setback.”
David Shapiro, deputy chairman at Sasfin Securities, says foreign direct investments depend on economic and political stability.
Once businesses are allowed to do business, growth will follow, but political ideology has to change, Shapiro says.
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