Johannesburg - Against the backdrop of a more subdued global economic recovery and muted domestic prospects, National Treasury has had to revise down real GDP growth forecasts between 2015/16 and 2017/18 by 0.5 percent (on average). The largest growth revision has been to 2015/16 where weaker commodity prices and energy supply constraints have prohibited higher rates of growth
Treasury now expects inflation to average 5.8 percent between 2015/16 and 2017/18; 0.4 percent higher than its estimates in the February 2015 National Budget, on the back of electricity tariff concerns and a weaker currency, while they have kept their oil price forecast in a tight range between $55/bbl and $57/bbl over the next three years.
Treasury warns firms’ ability to absorb higher input costs may narrow if rand depreciation and shrinking profit share continues, resulting in upside risks to their upwardly-revised inflation trajectory.
High public (and private) wage settlements were behind the higher-than-expected personal income tax and value-added tax (VAT) collections so far in 2015/16, allowing for a slight narrowing in the (consolidated) budget deficit-to-GDP ratio to 3.8 percent from the 3.9 percent predicted in February this year.
Lower revenue
Lower growth estimates have nevertheless shaved off R34.6 billion from gross tax revenues over the next three fiscal years, while total expenditure was ramped up by a further R37.7 billion over the corresponding period. The combination of a poorer outlook on growth and a higher-than-budgeted for wage bill suggests a delay in fiscal consolidation. According to government, the budget deficit-to-GDP ratio is expected to narrow to 3.2 percent by 2017/18, relative to 2.5 percent estimated in February.
Weak consumer confidence, tight credit conditions and anaemic employment growth pose a threat to the relatively robust personal income tax buoyancy observed over the past year, while muted commodity prices and benign demand is expected to weigh negatively on corporate revenue collections, further threatening Treasury’s expected fiscal consolidation timeline.
Although no specific revenue proposals were outlined, Treasury highlighted the Davis Tax Committee’s reports, commenting that an increase in VAT rates remains an option over the medium term.
We remain of the opinion that the timing of a VAT rise would coincide with meeting the financing needs of a larger project such as the National Health Insurance (NHI) plan further down the line, while options such as closing existing tax loopholes or raising capital gains taxes, estate duties or income taxes for the country’s highest income earners could be explored in the near term. Although we believe there is little appetite to raise corporate taxes (a deterrent to foreign inward investment), the proposed carbon tax will likely hinder corporate profitability further in the current environment.
Drawing down
Government has drawn down on the contingency reserve in an effort to cover the higher-than-expected public sector wage agreement that led to a R63.9 billion shortfall. The R5 billion reserve set aside for 2015/16 has been wholly absorbed, while a further R12.5 billion and R36 billion from 2016/17 and 2017/18, respectively, have been cut to offset a portion of the higher compensation bill. However, the implication is that SA’s fiscal manoeuvrability to deal with unforeseen revenue or expenditure shocks in the coming years has been compromised dramatically.
To make up for the remaining wage bill shortfall, Treasury warned departments may be required to shift funds within their own portfolios away from goods/services and capital budgets to support compensation budgets wherever moderate declines in employment and overestimations in budgets are insufficient to fund the overrun.
Although there was no detailed breakdown of budgeted infrastructure spend, Treasury projects over R800 billion worth in infrastructure over the medium term, which is to be accompanied by reforms to strengthen infrastructure implementation. Improved project execution is slowly materialising with local government underspend dipping to 9 percent in 2014/15, from 14 percent in 2013/14 and 23 percent in the prior fiscal year.
Although no additional allocation was made to tertiary education for this fiscal year, government has formed an inter-departmental team to work through the financial implications of a white paper on post-school education and to determine how to fund the expected expansion in enrolments.
Wilfred Moyo is an investment and economic strategist at Metropolitan.
IOL