The Trillion-Rand budget

Government will spend more than R1 trillion over the next year. Our budget deficit has been cut as revenue collection is stronger than expected. The minister of finance, Pravin Gordhan, tabled his third budget in parliament on 22 February 2012. As wit

Slightly less optimistic for 2012

Last October the Medium Term Budget Policy Statement was tabled against the backdrop of a somewhat optimistic economic outlook. South Africa’s GDP was expected to increase at 3.1% for 2011 and 3.4% for 2012.

However, in this budget Treasury has revised the growth outlook to 2.7% for 2012 and 3.6% for 2013.

Still solvent

Despite these constraints, government is projected to spend over R1.1 trillion for the first time ever. Revenue is projected to increase by R905 billion. It is remarkable that SA’s budget deficit will actually decline from projections of 5.5% last October to 4.6% in the current fiscal year. This will reassure investors (and rating agencies) that SA can manage its debt, which should keep borrowing costs at reasonable levels. Compared to most economies in Europe, SA Inc. is very solvent!

The juggling act

How was government able to produce this budget in a tough economic environment?

From 2004 to 2007 the South Africa economy was growing at an average of 5% a year. Tax revenue was boosted by healthy increases in company tax, personal tax and VAT receipts as consumption expenditure rose alongside overall economic growth. Also, commodity prices were booming so tax revenue from exports was also high. In addition, government has a very efficient tax collection mechanism via SARS.

Government’s fiscal prudence enabled it to step out and support the economy during recessionary times from 2009 to 2010 and even now in 2012 where economic growth still remains fragile. Tax relief was one way of stimulating the economy. Injecting R844 billion in investment expenditure over the next three years will also boost growth, at the same time enabling business to operate more efficiently and support growth and employment creation.

There will be a budget deficit of 4.6% to GDP in the 2012-13 fiscal year. Government is going to increase its borrowing to cover the shortfall between revenue and expenditure. The key is that the expenditure should not only be targeted towards social spending but also towards infrastructure which will yield a better return to the economy via better performing businesses which create jobs. This way government generates more revenue to repay debts.

Policy announcements

• The National Health Insurance discussion paper will be out in April; hopefully some clarity on the funding model will be provided.
• As expected no discussion on government’s stance on nationalisation, this will hopefully be clarified at the ANC policy conference later in the year.

What the budget means for the consumer

Tax relief

Given the fragile economic recovery and the resulting weaker revenue the minister gave a R9.5 billion tax adjustment to income taxpayers which compares favourably with the R8.1 billion last year and R6.5 billion the previous year. While most of the tax relief would be to adjust for inflation, in other words you would not pay more tax on an inflation-linked salary increase; low-income earners will see some real tax relief, which is good news for consumer-focused industries like retail and other services sectors.

The breakdown is as follows:

• Tax relief for people earning up to R160 000 is 45% of the R9.5 billion
• People earning between R160 001 and R260 000 will receive 39.9%
• People earning between R260 001 and R600 000 receive 31.8%
• People earning between R600 001 and R1 million will receive 7.7%
• People who earn more than R1 million will receive 6.5%

Social grants

The “social wage”, which is made up of social grants and free services for the poor such as healthcare, education and electricity, is calculated to be worth about R3 940 a month for a family of four. This provides substantial poverty relief. By 2015 it is estimated that 16.7 million South Africans will receive social grants including old age and disability grants, foster care and child care grants.

The good news is that the amount that government spends on social grants as percentage of GDP is actually declining, which means that the scheme is a sustainable one.

Employment creation

The budget was supportive of employment creation, particularly youth employment.

Not so good!

Excise duties on alcohol and tobacco increase each year and this year was no exception. The tax on a 340ml can of beer goes up by R1.01 from April 1, taking away from the discretionary income of those who indulge. Also, the fuel levy on diesel and petrol will increase by 20c, which will push the price of these products higher. The oil price is already quite jittery over threats from Iran to disrupt oil supply, higher oil prices combined with higher taxes will add to petrol prices and transport inflation going forward.

Gauteng toll fees

Government will use taxpayers’ money to contribute to a further reduction in the toll burden for Gauteng drivers with a R5.8 billion special appropriation. This will give a discount to road users who will now pay 30c per kilometre for light vehicles from 30 April. It remains to be seen whether critics will be satisfied.

A consumer perspective on budgeting

The way government finances are managed should not be different from personal consumer budgeting. Government receives its revenue from tax payers and individuals get their income from salaries.

When the economy grows individuals income goes up and so do government revenues. When the economy was booming, government was using extra revenue to reduce debt.

Households, on the other hand, were doing the opposite. They instead took more credit, leading to higher debt levels. The result has been an increase in the ratio of household debt to disposable income from 56.6% in 2004 to just over 75% in 2011.

With interest rates expected to remain unchanged in 2012, consumers must continue to work down debt levels at the low debt-servicing cost. Paying off expensive debts like credit cards and store accounts is a better ‘investment’ than putting the same amount into saving because the interest you pay on these debts is much greater than interest that you earn on saving. After you settle these debts, then you can start on a saving drive!