As the country waits with bated breath to hear what tricks the Treasury might have up its sleeve, this is one year where we don’t envy the Minister of Finance, as this is going to be a budget without any good news.
Significantly, Minister Pravin Gordhan may have to revise downwards the expected performance of the economy. In the recent medium-term budget policy statement (MTBPS), he projected a growth rate of 3.2 percent for next year, but this number no longer seems plausible. We expect he might have to tell the country not to expect gross domestic product (GDP) growth of more than 2.5 percent.
For the current year, all is not lost: the prospects are good that the country will achieve the fiscal targets set out in the MTBPS. Revenue growth lost a bit of momentum towards the end of the year, meaning there might be a shortfall on this front.
However, this may be offset by under-spending of a similar order, as recent trends suggest expenditure is currently running below the budgeted amounts.
We therefore expect the minister to announce that he will achieve the budget deficit of approximately 4.8 percent for the year and keep the funding requirement to the budgeted R166 billion.
The coming fiscal year presents more of a challenge. Firstly, in the MTBPS the minister signalled that he would aim for a deficit to GDP of 4.5 percent, with expenditure and revenue growth targets of 9 percent and 10.5 percent respectively. We expect the latter to present him with a significant challenge for the new fiscal year.
The recent loss in momentum of personal and company tax may well roll over into the new year. While Gordhan may this time round have been saved by very strong VAT growth – which we are benefiting from at the moment – one must doubt whether a similar performance is achievable next year, given the recent softness in retail activity.
Unfortunately for taxpayers, the minister might have to tweak tax rates a little bit and he may also have to be a tad cautious in terms of the usual compensation for inflation that he makes to income tax brackets.
There is a small possibility he may increase other marginal tax rates, for example, raising the top marginal rate from 40 percent to 42 percent or further increasing the including rate of capital gains tax, as was the case in last year’s budget.
There may also be modest scope to decrease the growth in expenditure, though it might be somewhat late in the day to make changes in expenditure targets, as most government departments would have received preliminary allocations figures for the new year at the time of the MTBPS.
An area for concern is the current account deficit: since the MTBPS it is apparent that the deficit has become uncomfortably large at more than 6 percent. The minister may have to acknowledge that a figure of 7 percent is more realistic in the course of the coming year.
This reflects some of the risks that the country faces: while it may be easy to finance a current account shortfall of this order by means of capital inflows in a world flush with liquidity looking for a decent yield, it is nonetheless clearly a great vulnerability.
Another consideration is the way in which the minister responds to the ratings agencies and the threat of further downgrades. Even though he might not say as much, there can be no doubt that it would have been uppermost in his thinking ahead of the Budget.
He would, therefore, be loathe to tolerate any further deterioration in the fiscal outlook and he might even be tempted to err on the side of conservatism by aiming to achieve a somewhat lower deficit in the coming year.
Interesting elements to look out for include any details about the tax review that President Jacob Zuma mentioned in his State of the Nation address. It is almost 15 years since the Katz Commission submitted its final report and an update would make sense at this stage.
A review would present the minister with the opportunity to revise more contentious tax issues, such as taxes on mining and the balance between taxes paid by different income groups.
The bottom line, though, is that achieving a deficit of 4.5 percent will be the big challenge to achieve in the new fiscal year. We expect Gordhan will be at pains to stick to that. This means that the funding requirements will remain largely unchanged and the Treasury will be able to stick to its current issuance programme.
André Roux is the co-head of fixed income and currency at Investec Asset Management.