The growing fiscal deficit shows business remains under stress

Mike Ronald, Head: Investment Team at Marriott Asset Management, looks at the latest figures from Treasury and concludes that the business sector remains under pressure. In addition, long bond yields may rise further as the deficit needs to be funded.

South Africa’s fiscal deficit jumped R20bn during the month of October to reach R129bn, already some R33b more than the budgeted deficit of R90bn for the year.

Under collection in tax revenue continues drive the increase in the fiscal deficit. Company income tax and VAT are both notably lower, being down 13% from an equivalent period last year. They have only brought in 74% of what was expected for the year to date.

This under-recovery in company income tax and VAT is yet another sign of our weakened economy. Revenue from VAT increased year on year by some 18% per annum during the period 2003 to 2007. This increase started to moderate from 2007 and by July 2008, stable and then declining VAT revenues started to hint at the recession that would only technically materialize in first quarter 2009. VAT collections from June to September this year have shown a marginal increase from last year’s levels but it is difficult to assess whether there is now an increasing trend in VAT collections or whether the cyclical nature of VAT revenue is out of kilter as a result of changing trading patterns during the recession.

Reduced revenue from company income tax shows a similar if delayed pattern. Company income tax increased around 22% per annum during the 2003 – 2008 period, but this year’s fiscal returns show a sharp drop in company income tax received, some 16% less than last year. It is likely that this trend will continue as company income tax returns have a six monthly pattern.

Only tax revenue from personal income tax has continued to increase since last year, albeit marginally, showing, perhaps, that taxes from wage increases have offset the loss in revenue from increased unemployment.

Government spending patterns have shown no significant variance from that which has been budgeted for. Should spending continue at this same rate, the deficit for the remaining five months of the fiscal year should increase beyond the current R120bn. Some commentators have suggested the eventual deficit could be R150bn and this may well be a conservative estimate.

This deficit needs to be funded and there has been a marked increase in both short and long term issuance from Treasury with an average of R3.8bn being sought per week, excluding the usage of government cash. This increase in issuance may be a contributing factor to the increase in yields on long bonds during the year.