BUDGET SPEECH MEAN FOR SA?
While many waited with bated breath for the 2016 Budget speech in hope that government would have a plan to turn the economic climate of the country around, many were left disappointed.
The reaction towards the speech couldn’t have been summed up better than by Standard & Poor’s response – the rating agency felt that this year’s budget speech lacked any significant policy announcements that will spur GDP growth or provide enough business confidence within the country.
And there were some who were left confused wondering just what the point of this year’s Budget speech was.
“The main aim of the 2016 Budget review was mainly to appease critics as to the state’s ability to pay for its expenses and debts with the approach of cutting the total expenditure by R25bn per year and over the next few years increasing taxes,” says Trudie Rohlandt, of Octagon Chartered Accountants.
She says that unfortunately no major bold strategic moves were included in the 2016 Budget, instead promises of spending reductions, procurement savings and tax increases that would allow a measured budget deficit reduction, and some budget reprioritisation, while shielding the little growth still left in the economy were made.
Just what were these tax increases?
The R18bn tax increase this year comes in three parts:
- Fuel levy (30c/l) and excise taxes provide an additional R9.5bn to the focus
- Only a third of full bracket creep relief granted, thus implying an effective income tax increase of R7.6bn (mostly contributed by incomes above R400k, the equivalent of a stiff income tax rate hike) with medical tax credit increase of R1.1bn
- Capital gains tax and transfer duty +R2bn. Thus keeping the redistribution focus alive while denying the need to strengthen supply side incentives
Says Rohlandt: “As to the question about how the state will accomplish the R15bn tax lift in 2017 and another R15bn in 2018, various options were mentioned – such as further income tax bracket creep relief denied, increase in marginal income tax rates, a new personal income tax bracket, an increase in VAT or other taxes.”
Yet, the question still remains, where does this leave South Africa?
The minister promised a very gradual deficit reduction, from 4% of GDP last year to 3.2% this year, aiming for 2.4% in 2018, she says. “From here, there will be a slow onward build up of a small primary surplus – offering not much of a buffer in uncertain times,” explains Rohlandt.
Will higher growth follow, as indicated by the Finance Minister Pravin Gordhan (growth projected as rising from 0.9% this year to 1.7% next year and 2.4% in 2018), because state-owned enterprises will be better governed, phased out or merged? Or will the private infrastructure funding (still unspecified) be used more effectively and businesses increase their spending?
“Talk of improved business confidence and follow-through appears to be hope based and a tad premature rather than well founded, seeing that nothing else has changed in the greater political paradigm, either,” she adds.
When asked whether South African’s should be concerned about their finances and the possibility of junk status, she responded that it is for rating agencies and markets to indicate in the coming months whether or not enough has been done by us to delay junk, or even deflect it.
At a briefing by international risk analysis, François Conradie, from NKC African Economics, said that a sovereign risk rating downgrade was likely this year, but it wasn’t a “massive deal”. He felt that Gordhan “made some good noises in his budget speech, yet he wasn’t able to convince the rating agencies of his ability to raise revenue”.
So, just what does this mean for the average South Africa?
This means that South Africa will have to borrow at a higher rate, which would increase debt servicing costs – the first thing ratings agencies would look at.