The 2020 Budget guards against S Africa's downwards trend in economic growth
JOHANNESBURG – The 2020 Budget finally delivered the actual cuts to its expenditure projections (R156 billion) that have long been deemed necessary, although the downwards adjustments are not as large as are needed.
This given the downward revisions to revenue projections in earlier years, which helps debt projections remain unchanged at above 71 percent of gross domestic product (GDP) in 2022/23.
The Budget does not consequently offer enough to see the credit rating outlook of South Africa return to stable – no downgrade indicated – after it was dropped to negative by Moody’s in November to show the agency’s intention of downgrading the country within18 months. However, the Budget offers some factors, which could help avoid a downgrade by Moody’s on March 27.
This does not mean that SA will not remain in line for a downgrade within this time period, but rather that Moody’s will take a large portion of this time to decide, possibly even stretching the decision to 2021 if SA continues to show incremental efforts to consolidate its finances.
The 2020 Budget is not an austerity budget. It guards against quickening the downwards trend in economic growth in the country by avoiding material tax increases and, indeed, aims to quicken economic growth by seeking to reduce corporate taxes, adjusting for fiscal drag this time around and not implementing a VAT increase to assist local households.
The rand consequently strengthened in response: to R15.13 to the dollar, R16.46 to the euro and R19.55 to the pound from a high reached yesterday before the budget of R15.11/$, R16.42/€ and R19.53/£ as markets favoured the outcome of the Budget somewhat, in particular, showing relief at the avoidance of any draconian tax hikes.
Indeed, weak economic growth continues to see revenue projections lowered.
The Budget drops its 2020 GDP projection to 0.9 percent year on year (y/y) in 2020 (previously 1.2 percent y/y projected in the 2019 Medium-Term Budget Policy Statement (MTBPS)), 1.3 percent in 2021 (previously 1.6 percent y/y) and 1.7 percent in 2022 (previously 1.7 percent y/y).
Fiscal slippage is apparent in the fiscal deficit, but the debt to GDP projections remain largely unchanged for 2022/23 at a very unhealthy 71.6 percent of GDP for an emerging market and 61.6 percent of GDP for the current fiscal year – with above 60 percent of GDP generally seen as unsustainable for an emerging market.
2019/20’s fiscal deficit rises to -6.3 percent of GDP, from 2019’s MTBPS projection of -5.9 percent of GDP, and for 2020/21 rises to a heady -6.8 percent of GDP (2019 MTBPS projected -6.5 percent of GDP), but then subsides towards -6 percent of GDP.
The Budget deficit in 1994/95 was -7.1 percent of GDP for the national government. Fiscal support for state-owned enterprises continues to remain unchanged, exerting a substantial burden on expenditure projections, and so on the debt and deficit projections.
Expenditure was not cut by as much as we estimated and as a result the debt and fiscal deficit projections are somewhat higher than the MTBPS, which is credit negative for the rating agencies.
The decision not to materially hike taxes is key as hiking taxes – instead of cutting planned expenditure as occurred in the 2020 Budget – would have negatively impacted consumers. Corporates, such as retailers among others, face consumers under pressure would have raised the risk of higher unemployment.
The net effect would have been a further dwindling in real disposable (after tax) income growth, which has been a key driver for the slowdown in economic growth in South Africa.
Higher indirect taxes, such as Eskom’s proposed 16 percent tariff increase would also erode households’ expenditure growth.
Tax hikes over the last decade have weakened growth. Indeed, if the government had failed to curtail its consumption expenditure, this would have dramatically worsened SA’s already weak economic outlook while further lowering business and consumer confidence – negatively impacting investment and potential economic growth.
Economic growth has slowed down consistently from above 3 percent in 2011 to likely around 0.4 percent y/y last year and this downwards trend has not yet reversed. The risk is that 2020 growth could come out closer to 0 percent if substantial load shedding and higher electricity tariffs are implemented, and weakening economic growth is also credit negative for SA.
In the private sector, rising unemployment, very weak economic growth and the fragile state of household finances have meant that consumer spending has been under significant pressure, with very low real (adjusted for inflation) disposable income increases, or at times contraction. Higher taxation over the past decade has also weakened economic growth.
The modest tax proposals of the Budget are, therefore, positive in light of this and “include personal income tax relief through inflation adjustments in all brackets” SA will likely remain on a negative outlook at Moody’s country review on March 27. While there were some concerns SA would receive a credit watch, we believe this is very unlikely.
A credit watch is used when a credit situation is very fluid, and so changing, and the outcome is very uncertain. However, SA is seeing a slow change in the right direction.
Annabel Bishop is Investec Bank’s chief economist in South Africa.