POLITICAL GIFT OR ECONOMIC CURSE?

The proposed VAT alterations in the Republic of South Africa have adorned our finance minister with a political gift. That is if the South African budget is passed without reservations. The nation has been made to believe that there was no alternative, Eswatini would also have to follow suit. Well, today I want to bring it to the fore that there is always a choice in economic policy. Also, I want to argue that the minister is not ready for this political gift, because it will turn into an economic nightmare.

Choice

In economics we always have base policy, the first go-to policy, which is do nothing and let the card fall any which way. Eswatini can do nothing and hold VAT steady at 15 per cent. This will not be a first time event, the Kingdom held steady at 14 per cent when South Africa increased to 15 per cent. Eswatini only moved to 15 per cent a year later and the economy did not grind to a halt. ERS, SRA at the time, met its VAT targets albeit the delays in claiming of VAT.

Granted this will present a minor cash flow problem for government and a transient double payment burden on the importer, as the claims process will be tedious and refunds may take a month or two to process.

All temporary effects, requiring an alteration in government’s projected cash flow, with zero impact on the projected envelope. In this regard the Minister’s argument of problems in the claims process can actually be refuted. Also, trade relations ought not to have impacts on our fiscal policy independence; unilateral decisions in South Africa cannot affect our fiscal policy decisions. If indeed there is an arrangement for the VAT between South Africa and all SACU countries, then I believe this proposed increment in VAT ought to have been discussed with all SACU countries and the minster would have tabled a budget with a VAT proposal. If indeed the minister will push through with this VAT proposal, he must also table a revised budget to ensure effective oversight and controls.

Revised budget

The budget was presented with a provisory on projected revenues and it was approved based on those projected revenues. The minister must then present a budget incorporating these tax changes. If parliament grants the minister his prayer on the VAT increase, then they would have given the minister free reign over the fiscal purse, allowing for expenditures with no clear budget line, presenting difficulties in budget controls and oversight. Actually, new lines may be created post budget approvals.

The finance ministry must act within a given set of rules and they must not be left to act on their discretion. This proposed VAT increase ought to affect the projected deficit. Parliamentarians need to approve this increase with a clear direction on what will happen to the loans that government is floating. I argue that the minister is literary going to have a budget that has not been approved by parliament. I am particularly worried about the deficit since this administration seems to have a none-satiable appetite for debt, always leaning on the denominator argument which I find to be a false argument.

Denominator argument

Maintaining a debt to GDP ratio of 40 per cent does not necessarily mean ability to pay. Debt is paid through tax revenue, not through GDP. The GDP must engender an increase in taxes, in the absence of that increase then the debt will be difficult to service and we will have to forego some social spending. At present the country spends over E2 billion on interest payments. The reason South Africa desperately needs this VAT increase is because they are slowing heading into debt overhang.

They have exceeded the recommended 60 per cent debt to GDP ratio. Eswatini has already exceeded the recommended 40 per cent. By my calculations the country’s debt to GDP ratio sits between 43 per cent and 45 per cent. The government’s loan appetite gravely worries me, therefore, if parliament is to approve this VAT increase, the minister must present a new budget with clear budget lines and congruent alteration on the deficit and loans required to finance this deficit; lest we find ourselves in debt overhang. Also, I argue that we ought not to regard GDP in nominal terms but rather on real terms.

Economic curse

The consumer who is already battling with cost-of-living pressures will be further burdened as a result of this VAT increase. Water and electricity have already increased placing further strain on the consumer. Aggregate demand will reduce, slowing the economy. If this VAT proposal is approved, I anticipate rigorous negotiations on salary increments; this will be a zero sum game, with no winners. Workers will agitate for increases in real income to match the mounting inflationary pressures. The minister might just have to spend that 0.5 per cent increase on the salary review.

Political curse

This presents a political nightmare for MPs who depend on their base for re-election. The proposed VAT increase may alienate the voter’s base and might cost elected politicians the next election since consumers have a long memory and they depend on MPs for oversight.

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