Budget 2009/2010: an austere occasion

André Roux, head of fixed income at Investec Asset Management, looks ahead to what we can expect from Finance Minister Trevor Manuel when he unveils the national budget on 12 February.

This is likely to be Finance Minister Trevor Manuel’s toughest budget by a long shot. Back in September last year, when the Medium Term Budget Policy proposals were drawn up, the world was a different place and it seemed as if South Africa would maintain reasonable growth in the New Year. But that is all history now.

We now know that the economy is likely to struggle and we’ll be lucky if we end the year with positive growth. The deterioration in the economy is already evident in the monthly revenue and expenditure data issued by Treasury. Vat receipts in December, for example, were down to what they had been a year before and far lower than what had been budgeted in February last year. The same applies to company tax, which has also run into negative territory.

We expect a superhuman effort from SARS in the dying weeks of the fiscal year. Revenue for the current financial year is likely to fall short by about R12 billion from the revised figures introduced in September. The deficit will probably rise from the revised R9 billion to an amount in the region of R20bn.

We have become used to Treasury exceeding their revenue targets year in and year out, so the shortfall is likely to be a new experience for them. In itself, it is not a problem and Treasury has already been stepping up its issuance programme steadily in recent months. The real problem is that the base for calculating next year’s revenue is now a lot lower.

The medium-term expenditure programmes announced in September last year provided for various plans unveiled in the ANC’s manifesto. Non-interest expenditure growth for the next fiscal year was projected to increase by 18% above this year, which by any reckoning reflects fairly substantial real growth and appears to provide more than enough money for the first stages of the somewhat more expansionary programme of the new ANC leadership.

We don’t expect Manuel to be under any pressure to increase this level of spending. Likewise, against the backdrop of a global growth slowdown, we doubt that he would want to reduce the level of spending either. We believe he will do his level best to maintain his commitments to all the infrastructure and poverty relief programmes and will probably try to stick to the expenditure numbers he set out in September.

As far as the revenue for the next financial year is concerned, there is no way Manuel is going to achieve the targets set out in September. Indeed, he will be lucky if he maintains growth in company tax at some positive level, while the performance of VAT in the 5-6% range will probably be no better than this year. Personal income tax, however, is likely to remain reasonably buoyant, largely because remuneration levels would have risen based on the higher wage settlements we have seen over the course of last year.

We shouldn’t expect Manuel to be as generous to taxpayers as in previous years, although he may try to deal with the fiscal drag on personal income tax to provide relief against inflation erosion. We expect some R5 billion to be given back to the taxpayer.

Revenue for next year will be lower by some R18 billion compared to the September figures, while next year’s deficit will be revised upwards from around R52 billion to R70 billion, equivalent to about 2.6% of GDP. It is a much bigger deficit than we have become used to in recent years and harks back to the years when Manuel took over as Finance Minister. However, given the deficits we are seeing globally, it is still relatively conservative. In the US, for example, the deficit for the year is expected to exceed 10% of GDP.

It may well cross Manuel’s mind whether he is not being too conservative, but in our view he wouldn’t want to revive the consumer boom or widen the deficit further by cutting taxes substantially. He will probably be too worried about a worsening current account deficit, which is always a possible source of instability.

The deficit will put more pressure on funding. There are significant foreign redemptions in the next fiscal year so the net domestic bond funding requirement will probably be in the region of R70 billion. While current bond auctions are in the order of R1.2 billion a week; these will rise to R1.8 billion a week as the fiscal year progresses.

The bond market is likely to suffer from bouts of indigestion and we will see some upward pressure on the long end of the curve; indeed, the market is already starting to price this in.

This is not going to be a fun budget, so be prepared for an austere occasion. Manuel would have just returned from Davos, where the dialogue is likely to have been gloomy – we expect he will use the occasion to warn the nation to tighten their belts and prepare for a tough year!