South Africa’s fiscal cliff: A reflection on the appropriation of government resources
In the title of this paper the meaning of the words “fiscal cliff” differs from the meaning attached
to these words when used with regard to the fiscal situation in the United States of America (USA).
In this paper these words imply the danger that the South African government might run out of
income to cover growing government expenditure, while they are used in the USA to depict a
ceiling on the borrowing capacity of the federal government.
This paper compares the South African government’s expenditure on social grants and civil
service remuneration since 2008 with government revenue over the same period.
Social grants have grown at a substantial rate since 2008, amounting to some R105 billion
in the 2012/13 fiscal year. Social grants as percentage of total government revenue increased from
12,6 per cent in the 2007/08 fiscal year to 14,2 per cent in the 2011/12 fiscal year. This analysis
does not take into consideration the envisaged phasing-out of the means test for qualification for
the old-age grant.
Between 2008 and 2012 total employment in the civil service (central government and
provincial governments) increased by 13,0 per cent. At the same time the total civil service
remuneration bill increased by 76,1 per cent. Civil service remuneration as percentage of total
government revenue increased from 31,7 per cent in the 2007/08 fiscal year to 42,2 per cent in
the 2011/12 fiscal year.
In 2008 social grants and civil service remuneration accounted for 44,3 per cent of total
government revenue. This increased to 56,4 per cent at the end of the 2011/12 fiscal year.
This analysis also shows that these two expenditure items will account for all government
income by 2026, should current growth trends in these expenditure items continue, and assuming
average nominal government revenue growth of 9,9 per cent (2012–2017), 9,7 per cent (2018–2030)
and 8,6 per cent (2031–2050) per annum.
In an attempt to avert this fiscal cliff in 2026, structural one-off increases in government
revenue were considered. A one-off increase in revenue can amount to R47,4 billion, based in the
main on:
• the imposistion of two additional marginal personal income tax brackets (45 per cent
on taxable income above R1 000 000 per annum and 50 per cent on taxable income
above R2 000 000 per annum, and on an assumption that these tax rates will not change
the behaviour of these high-income earners);
• an increase of one percentage point in VAT from 14 per cent to 15 per cent;
• an increase of three percentage points to 31 per cent in the company tax rate; and
• an increase of ten per cent in the fuel levy and excise duties.
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These increases in taxes will postpone the fiscal cliff from 2026 to 2028, but will not avert it. As
a further drastic measure, a 72 per cent marginal tax rate (a level used in the early 1970s) on
taxable income above R2 000 000 per annum (and on the same assumption as before) will simply
divert the fiscal cliff by one additional year to 2029.
The conclusion is that social grants and civil service remuneration have reached a level
where further real increases are unsustainable, even if taxes are increased. South Africa faces a
fiscal cliff that can only be avoided if the South African government is prepared to take drastic
steps in the interest of the country, rather than in the interest of the ruling party