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Avoiding junk status

01 March 2016 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

The 2016 National Budget was presented against a backdrop of continued social unrest and the treats to downgrade South Africa to junk status. Both of these events have had a significant toll on the country in the past, and threaten to have a future impact if no resolution can be found.

With these events in mind, an under pressure Finance Minister Pravin Gordhan delivered what many regard as a surprising budget. But how was it received by economists?

The ace up our sleeves

One of the major acknowledgements by economists is that Gordhan made some significant promises in his speech, and his ability to deliver on these promises is what will determine the economic welfare of the country during the year.

“South Africa has seen significantly low growth, but so has the rest of the world,” reports Stanlib Chief Economist Kevin Lings. “However, developing markets sold the world a promise that going forward, they would immeasurably outstrip expected growth. This has not materialised since the global financial crisis.”

While we are considered a developing market, South Africans are generally not satisfied to be compared with the rest of the world and we expect a lot out of our leaders. But Lings says that it is worthwhile to compare our story with that of Brazil.

“Over the past eight years, Brazil has been seen as the poster child for developing market growth. Their economy was boosted by positive sentiment surrounding the 2014 FIFA World Cup and the 2016 Rio Olympics. Now they are in a recession and face corruption. Why? Because their government is viewed as anti-business,” says Lings.

During Gordhans speech, Brazil was downgraded to junk status. This could have been avoided if Brazil followed a simple formula.

“It’s not about what you do when you are downgraded. It’s how you react after a downgrade. South Africa was recently downgraded and we are implementing measures to avoid a further downgrade. Brazil did nothing.”

Corrective actions

Gordhan has not been short of advice on how he must go about saving the country. Many have called on him to slash the public sector wage bill as it is too high. Lings points out that the problem with that is that there is a cost involved in this process; this cost will be added on at the end of the process, which is working against the very goals that the public wants.

“There needs to be infrastructure investment. If we focus on fixed investment spending, we will create jobs and can decrease our spending on social protection. Without jobs, social protection will have to grow, and this will become problematic in years to come as we teeter on the edge of becoming a nanny state,” said Lings.

Taxes fill the coffers

Tax revenue collection has always been government’s main source of income. However, there have been recent concerns that South Africans are getting taxed to the limit and that something will eventually have to give. “There is legitimacy for South Africans to step back and ask what they are receiving for the tax that they are paying. The answer to this is currently they are receiving very little when one considers that they have to pay for their own security, own medical aids and own pensions,” says Lings.

As a result of this, Gordhan bit the bullet and didn’t increase personal income tax or VAT. Lesiba Mothata, Chief Economist at Investment Solutions, points out that this does not mean that government won’t collect tax revenue from other places.

Capital gains taxes have effectively been increased by three percentage points (from 14% to 16%) for individuals, four percentage points (from 19% to 22%) for companies while trusts will also see an increase.

In the real estate sector, transfer duty for home sales more than R10 million have been increased by two percentage points (from 11% to 13%). In addition to these, the fuel levy has been increased by 30 cents a litre.

There were significant rumours in the lead up to the budget that Gordhan would definitely increase VAT. However, this was never going to happen in an election year. “VAT is a bazooka,” says Independent Political Analyst JP Landman, “it needs to be used effectively and may be used in the future to fund the roll out of the National Health Insurance Programme. The Finance Minister is well aware of the effectiveness of VAT as a bargaining chip and will not use it to balance the budget. We have also seen the significant opposition to raising VAT, this opposition can never be underestimated.”

Editor’s Thoughts:
If Gordhan does what he has promised and decreases government spending, we can avoid junk status. However, this will be an uphill battle and will largely be driven by infrastructure investment which would create jobs. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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