Budget | Holding the line… sort of

Nazmeera Moola, co-Head of Fixed Income, Investec Asset Management

Under difficult circumstances, National Treasury produced a Budget very much in line with the October Medium-Term Budget Policy Statement (MTBPS), particularly on the expenditure side. While there will be some disappointment in the revenue slippage and increased issuance, we believe the budget should be enough to retain SA’s credit rating through June 2017 - provided that there are no major personnel changes at the Finance department and that growth continues to improve as forecast. Unfortunately, the former in particular is not a given at this point.

To retain our investment grade rating over the longer term, South Africa requires much higher growth forecasts of 2.5-3.5% per annum.  That requires actions from a range of departments beyond the National Treasury to support growth.  

Revenue raising 

Most of the focus in the 2017 Budget is likely to be on the super tax introduced for the very wealthy, with the marginal tax rate of those earning more than R1.5 million a year increasing to 45% from 41%. However, as there were only 75 000 individuals in South Africa earning above R1.5 million a year in 2015, this measure is only likely to raise around R4.4 billion.  And with the base very small at the high end of the income distribution spectrum, the room for further tax hikes is very limited. 

The real issue is that by far the biggest contribution to the coffers will come from the limited adjustments for bracket creep. The full adjustment for inflation would have amounted to R14.6bn and Treasury only provided R2.5bn in relief, thereby bringing in an additional R12.1 billion. The upshot is that every single income tax payer is affected and paying the price of SA’s slow growth and inefficient expenditure. This will certainly constrain consumption growth in 2017, and make the case for the SARB to start considering rate cuts by mid-2017 stronger. 

Other measures announced to raise the total additional ZAR28billion include the by now predictable increase in sin taxes (projected to raise R2.1 billion), a 5% increase in Dividend Withholding Tax to 20% (R6.8 billion) and a 30c per litre increase in the general fuel levy (R3.2 billion). 

Expenditure 

It appears that spending is in line and not likely to deviate from the MTPBS forecast, which set out savings of R20bn. However, there should be a concerted effort on the part of the entire government to curb the wastage that is evident across departments. 

Issuance 

The persistent increase in issuance (forecast to increase by 8-10% per annum over the next three years) is disappointing. To date, issuance increases in recent years has been swallowed by foreign and local investors because of low interest rates globally, a stabilising China and sluggish local growth.  However, at some stage the buyers could dry up.  We would rather see further commitment to supporting growth and cutting expenditure than higher taxes and increased issuance.