A sobering budget is on the cards

Lesiba Mothata, Chief Economist at Investment Solutions

and Kevin Lings, Chief Economist at Stanlib

It is no secret that South Africa has been facing tough economic times over the past two years. A lack of confidence, rising inflation and poor growth has seen the country clutching at straws to find some measure of hope on the economic front. This will hopefully come when Finance Minister Pravin Gordhan presents the national budget on 23 February. However, if the past two budgets are anything to go by, we could be in for some unwelcome surprises.

FAnews caught up with Lesiba Mothata (Chief Economist at Investment Solutions), and Kevin Lings (Chief Economist at Stanlib) to find out their thoughts on what this year’s budget will bring.

Mixed views

The past two editions of the budget – 2015 and 2016 – were both described as fine balancing acts as government came to grips with slow economic growth and the reality of the tough economic situation that South Africa finds itself in. 

Will this year’s budget be any different? Mothata feels that it will be different. “Government has done well to put out fires in the Medium Term Budget Policy Statement, and the cyclical drivers of gross domestic product growth have been performing admirably given our sluggish growth. There has been some improved activity in corporate profits, and exports have been going well. Sub-Saharan Africa still relies on South Africa for exports of plastics and raw minerals that are used in catalytic converters. There were also improved exports in motor vehicles which are assembled in South Africa,” says Mothata.

Lings was more measured in his view and pointed to the fact that government is fighting a war on two fronts. “On the one front is an ever expanding expenditure ceiling which government is doing its best to decrease and control. On the other hand, there is a severe revenue shortfall which is expected to be between 13 and 14 billion. If anything, this will be a sobering budget,” says Lings.

A tax budget

Both Mothata and Lings have said that this will be a tax budget with steep tax increase on the cards.

“We could see a higher income tax bracket being introduced and we could see a movement in wealth taxes. Come what may, the rich may be facing more of a burden. There will also be a steep increase in the fuel levy which has recently been used to fund the fiscus as it is an indirect tax that affects people who have the money to run a motor vehicle,” says Mothata.

Lings adds that there will be age old increases and age old dismissals.  “There will be no move on increasing VAT, and corporate income tax collection is not performing as well as it should. So the consumer will feel the brunt of tax increases. Further, the public needs to prepare itself for an increase in the fuel levy would most likely be in excess of 30 cents/litre. There may also be a 1% rise in the top marginal rate which could result in good revenue collection,” says Lings.

The immensity of the task comes into sharp focus when one looks at a few numbers. Lings points out that in a weak economic environment, government has committed to collect an additional R43 billion over the next two years. Government hopes to collect 27 billion of this in 2017.

The consumer worry

Where would the consumer be most affected by the budget? Lings feel that there will be a significant reality check among consumers who are systematically being pushed into a corner when it comes to taxes.

Government also cannot borrow its way out of trouble because of negative sentiment that the international community has regarding the country. If South Africa is downgraded to junk status, government realises the trouble we will be put in.

“Because of this, government is going to make the environment even tougher. There will be no expanded social programme, there is rising unemployment and there is little confidence from the private sector. Allocations to education, health and social service will be modest as government tries to find ways to become more efficient with the money that it has,” says Lings.

Tough, mature engagement

What we saw in 2016 was unprecedented. There were ongoing concerns regarding a possible ratings downgrade, and there was open animosity between President Jacob Zuma and Gordhan.

“I don’t think that this will carry on this year. A number of high ranking ANC veterans have had a word with President Zuma pointing out what damage open warfare with a Finance Minister is doing to the country and international sentiment regarding South Africa,” says Mothata.

He pointed to a further factor. Standard & Poor’s (S&P) rules state that the ratings agency cannot place a country on negative watch for more than 24 months; so in December, S&P has to make a final decision as to whether the drop will happen or if our outlook will be upgraded to stable. Mothata adds that this would complement Moody’s rating of stable. At this stage, it wouldn’t matter what Fitch does because you need more than one rating agency to recommend a downgrade for it to take effect.

Editor’s Thoughts:
It is not like we are unaware of the challenges that we face. All we can do is hope that government makes the decisions that the country needs to grow and move forward. The waiting game has begun. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.