Needless to say, Minister Pravin Gordhan was faced with a daunting task in delivering his recent Budget. The possibility of a ratings downgrade whereby SA would be reduced to “junk status” hung like a dark cloud over the whole proceeding.
Much was expected of Gordhan. From radical cuts in government spending, privatising non-performing State Owned Enterprises, to trimming President Zuma’s bloated cabinet. Tax increases were expected, among them a 1% increment in VAT as well as an adjustment to the top marginal rate of tax. The introduction of a wealth tax was high on the list of items expected to be introduced.
Whatever the detail, it was speculated that the various Ratings Agencies were looking for SA to be placed on a clear growth path whereby prudent expenditure and sound economic growth would be features in the coming years which bringing with them greater employment and social stability. With these clear messages it was hoped that SA would avert losing its investment grade status.
In reality, and certainly from what we now know was going on behind the scenes, Gordhan was not in a position to give the markets and the agencies precisely what they were looking for. Newly restored to the Finance Ministry, following the December hiatus over his two predecessors, Gordhan had little authority to act on all the remedies bandied about to kick start the economy and by so doing avert the possibility of a downgrade.
Nevertheless, the primary aim of the Budget was to address SA’s damaged fiscal credibility and to restore confidence as a catalyst for growth. To an extent Gordhan, possibly by his mere presence, went some way to achieving this. Markets didn’t agree at first, with the Rand going into reverse but there has been considerable recovery since then. It didn’t help of course that as Gordhan was speaking our BRICS partner, Brazil, was downgraded to junk status by the rating agencies!
There was fairly constant mention in the speech of the much vaunted National Development Plan (“NDP”) which according to Gordhan is underpinned by “inclusive growth”, “a strong mixed economy” and “investment in infrastructure”. The NDP has been virtually lying on the shelf for some time now. It is to be hoped that with Gordhan’s encouragement, it can now start to be fully implemented.
As a result of so-called enhanced “fiscal consolidation” measures, it is expected that the budget deficit will narrow from 3.2% of GDP in 2016/17 to 2.4% in 2018/19. The aim is to keep overall debt within the 50% of GDP level and it is expected that this will reduce to 46.2% in 2017/18.
Economic growth is expected to be less than 1% in the current year which is down from the 1.7% forecast in October last year, increasing, perhaps somewhat optimistically, to 2.4% by 2018. This projection is somewhat shy of the IMF’s 3% minimum and a long way short of the 7% needed to fully address the country’s serious unemployment problem.
Gordhan neatly side-stepped the VAT issue by increasing the fuel levy. The latter affects the population as a whole in a similar way that VAT does but it is less of a political football. The usual range of sin taxes were introduced including a levy on sugar- sweetened drinks. A tyre tax was also introduced ostensibly to assist in recycling.
There was no increase in direct taxes for individuals or for companies. In fact there was some very marginal relief in respect of so-called bracket creep. This amounted to between 0.5% for top bracket earners to 3% for those in the lowest bracket. Clearly not adequate to offset the effects of inflation.
There were increases to Capital Gains Tax which are described below in “A brief summary of how the budget affects you”.
Spending on Social grants was increased by 8%. Whether or not it is something to rejoice about that 34% of our population of some 53 million are now on one sort of social grant or another, is entirely another matter!
Overall it is expected that tax revenue will increase by R18bn this year and by R30bn combined for the following two tax years. At the same time the public sector wage bill growth will be limited with employment in that sector “frozen” from April.
Yes, Gordhan could have increased the top marginal rate of tax by 0,5%, which everyone was expecting, but within the constraints he was bound by, this was , in our view, a job well done.
Nevertheless we can only speculate at this stage if SA has managed to avoid a downgrade. Much may depend on effective support given to Gordhan’s programme to cut government spending and to implement the NDP as far as possible. The last thing we need now is for more shocks to the system.