OECD Looks For South African Fiscal Consolidation

by Lorys Charalambous, Tax-News.com, Cyprus

21 July 2010

The Organisation for Economic Cooperation and Development (OECD), in its 2010 Economic Survey of South Africa, considers that the effect on the country of the economic recession was rightfully moderated by a countercyclical policy response, but that fiscal consolidation may now be required.

The OECD points out that South Africa has a good track record of fiscal prudence, but, as in other countries, fiscal discipline was eroded in the cyclical upswing. However, while the current fiscal deficit is high historically at 6.7% of gross domestic product (GDP), public debt levels remain moderate by international standards at only 32.8% of GDP.

It believes that “the modest withdrawal of fiscal stimulus foreseen in the 2010-11 budget achieves about the right balance between supporting demand and preserving fiscal sustainability as long as the economic recovery is in line with government projections. As the recovery proceeds, or if it is faster than expected this year, there should be further fiscal consolidation.”

The OECD believes that South Africa would benefit from stronger fiscal institutions to prevent unwarranted fiscal expansion when the economy is strong. While the commitment of South Africa’s National Treasury to prudence remains unquestioned, the OECD says, “South Africa might benefit from additional mechanisms to prevent similar policy errors in future cyclical upswings. This could usefully include a target on the structural balance, buttressed by an expenditure rule.”

It adds that “a number of other resource-rich countries have opted to create commodity funds to better insulate their budget and economies from swings in commodity prices. Linking net flows into these funds to commodity prices reduces pressure to spend windfalls when prices are high and provides an extra source of budgetary finance when prices are low.”

Although South Africa’s case is less straightforward than some others, “since direct tax revenues from mining are unusually low relative to the size of the sector, and since the revenues come from a number of commodities”, it suggests that, “perhaps in conjunction with a greater effort to identify and tax economic rents from natural resource extraction, a mechanism to ensure that commodity price windfalls are saved should be given further consideration.”

Finally, it has seen that South Africa tends to score relatively poorly on the control of greenhouse gas emissions, largely due to its industrial structure and its heavy reliance on coal for electricity generation. It considers that “the urgency of the global problem, South Africa’s status as a relatively large emitter, and the slow progress to date all suggest that efforts to mitigate emissions should be accelerated.” Measures to be taken could include a move to electricity prices that fully cover long-run costs, with no subsidies for industrial customers; and a carbon tax and the greater use of other green taxes.

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