Budget 2016 may be a rollercoaster if government has its way
Rian le Roux, Old Mutual Investment Group Chief Economist
While we all like to remain positive and approach life with an optimistic outlook, it is sometimes difficult. And there is no easy way to say what I am about to say: South Africa is in an economic slump and we are going to feel the effects.
But we have seen this unfold over the past two or three years. We have seen the Rand depreciate to record lows against foreign currencies and we have heard that it is almost impossible for Finance Minister Nhlanhla Nene to manoeuvre around.
We have collated some commentary from analysts to see how this will affect us.
Tax increases
There is no way around this issue; tax will probably be increased again in the new year. Writing for the Sanlam Intelligence newsletter, Arthur Kamp, Investment Economist: Sanlam Investment Management, feels we may be in for a significant shake-up.
“Overall, weaker growth projections have lowered expected revenue collection by a cumulative R35 billion over the next three fiscal years. Accordingly, the Minister continues to pave the way to introduce higher tax rates or new taxes at some point, including carbon tax, a higher VAT rate, changes to estate duty and possibly the introduction of wealth taxes, along with a focus on reducing revenue loss through profit shifting and misuse of transfer pricing,” says Kamp.
He adds that special appropriations for Eskom (R23 billion) and the New Development Bank (R2 billion) have been added to spending in the current fiscal year; although this is funded through the sale of state assets.
As a result, total spending is now projected at R1.37 trillion in 2015/16, compared with the initial budget of R1.35 trillion. Importantly, though, the National Treasury has kept support for the State Owned Enterprise and the Development Bank deficit neutral.
The dragon in the room
A major concern in the country over the past few years has been the budget deficit and the fact that it is growing rather than decreasing. Government is trying to use taxes to resolve this, but are we seeing any joy?
Addressing the media, Rian le Roux, Old Mutual Investment Group Chief Economist, says that the Budget deficit – which is a country’s financial health status, where expenditures exceed revenue – remains a concern, as the Medium Term Budget Policy Statement announced it has risen from the budget estimate of 2.6% to 3.3% in 2016/17, and from 2.5% to 3.2% in 2017/18,”
“While it was generally expected that Nene would raise the budget deficit target for the period beyond 2015/16, the increases were certainly more than expected, and financial markets reacted negatively, with the Rand weakening and bond yields rising.” However, he says that this budget outcome is unlikely to result in a downgrade from the ratings agencies over the short term, but there is still the risk of a downgrade by Fitch in December, and the disruption by student protesters probably hasn’t helped matters.
“Taking into account Government’s considerable and increasing fiscal constraints, its primary fiscal goal is to stabilise the level of Government debt over the next few years. Net government debt is forecast to stabilise at 45.4% of GDP in 2019/20, which is only slightly higher than what was forecast in the February 2015 Budget. Stabilising our debt position is vital if South Africa wants to maintain its investment grade rating from the key rating agencies.”
A difficult balancing act
Speaking at an Investment Solutions lunch just after Nene’s speech, Lesiba Mothata, Chief Economist: Investment Solutions, says that economists have become accustomed to looking at budgets in a clinical way, around the fiscal metrics and talking about a difficult balancing act being required to put them together.
“While all that is correct, and Nene has focused on debt, much more is needed for this economy. Fiscal policy can be used to make big changes to the economic landscape. As it stands, South Africa has resigned itself to low growth,” says Mothata.
He adds that the economic underperformance since the financial crisis is a well-accepted fact, but little has been done to turn the tide. Looking globally, countries have been in competition with each other to scrap as many laws as possible to reduce the burden and inefficiency of regulation on their economies, with India and Mauritius notable examples.
The tax policy has been structured to unleash the potential of corporates to invest and grow. India has reduced its company tax rate. Mauritius delivered a no tax budget earlier in the year with proposals to significantly change its economic fortunes.
Editor’s Thoughts:
It looks like the belt that former Finance Minister Pravin Gordhan asked us to tighten needs another hole to be put into it. With all of the noise about tax increases becoming louder, we can only hope that the additional revenue will be used to get us out of the hole we currently find ourselves in. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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