Economists weigh in on Gordhan’s plans

Motorist fill up their cars with at an Engen Garage in Bryanston north of Johannesburg before the price of petrol could go up after midnight. Picture: Boxer Ngwenya

Motorist fill up their cars with at an Engen Garage in Bryanston north of Johannesburg before the price of petrol could go up after midnight. Picture: Boxer Ngwenya

Published Feb 25, 2016


#Budget2016 / Johannesburg - Economists and financial analysts have reacted to Finance Minister Pravin Gordhan’s budget speech...

Read: No surprises in #Budget2016


* In addressing the persistent budget deficits, as expected, a combination of increased taxes and cost containment has been proposed, with forecasts of a reduction in the budget deficit to 2.4 percent in 2019.

With respect to increased revenue, the implications are that this will largely be achieved by way of increased taxation on higher-income earners, higher fuel levies, new emissions, tyre, sugar and other taxes, and an increased tax rate on some smaller tax contributors, generating about R15 billion a year.

Government revenues will, however, continue to remain vulnerable to a further deterioration in economic conditions.

Through various proposed initiatives aimed at bolstering investor confidence and reducing corruption, the minister is of the view that economic growth will recover in 2017 and 2018, with job creation following suit. This will be one of South Africa’s greatest challenges.

Rating agencies will digest the minister’s comments and stringently assess the realism and ability to rapidly institute the new initiatives proposed by the minister and their impact regarding key sovereign rating parameters.

In due course, they will communicate their findings, and it remains to be seen whether they are of the same view as the minister, in that sufficient measures have been taken to avert a sovereign downgrade for now. – Marc Joffe, the Global Credit Ratings chief executive


* The Budget shows lower-than-previously projected deficit figures and a stabilisation of debt over the medium-term period out to 2018/19. As a percentage of gross domestic product (GDP) the fiscal deficit falls by 2018/19 to a sound 2.4 percent of the GDP from the 3 percent medium-term budget policy statement.

While debt as a percentage of GDP rises to 46.2 percent it remains unchanged in rand terms and the widening ratio is due to lower GDP projections. This will probably initially placate the rating agencies, as projected net debt ratios decline thereafter, with the main budget primary balance reaching 1.2 percent in 2018/19.

The deficit and debt developments (as a percentage of GDP) are positive, with South Africa avoiding fiscal slippage for a change. Projected non-interest expenditure flattens out below 30 percent of GDP, and interest payments at about 3.5 percent of GDP. Social services will account for 56 percent of consolidated expenditure, debt servicing costs 10.1 percent with economic affairs and agriculture to receive 16.3 percent of expenditure. – Annabel Bishop, Investec economist


* The big take-away from the Budget was the faster pace of fiscal consolidation that is planned – not so much in the current fiscal year, where there is a very slight widening of the budget deficit, but in the years that follow. This is no easy achievement, given the halving of expected real GDP growth this year.

Encouragingly, the fiscal consolidation will be achieved through a combination of spending cuts and tax measures. Spending on the public sector wage bill will be reduced, largely through planned reductions in the headcount.

The tax measures that are proposed for the 2017 financial year are small – largely, tweaks to capital gains tax, an increase in the fuel levy by 30c/litre, and other modest measures, such as an introduction of a sugar tax. Looking at expectations for the medium term though, there is still a commitment to do more – and these are already incorporated into forecasts.

A rise in the rate of VAT or the top rate of income tax cannot be ruled out over the medium term – the former in particular will probably drive even greater revenue increases than those tabled today.

From our perspective, the really encouraging news is the achievement of a primary fiscal surplus – for the first time since the global financial crisis. On a consolidated budget basis, this is expected from 2017 financial year, with the primary surplus as a percentage of GDP rising over the medium term.

How robust are these forecasts though? Debt servicing costs are an increasing concern, with 12c out of every rand of revenue collected now needed for debt service. State-owned enterprises (SOEs) still pose a risk to public finances, and deeper reassurances on reforms will likely be needed to mitigate this threat. – Razia Khan, Standard Chartered Bank chief economist for Africa


* The focus of the Budget was on tax relief to lower- and middle-income earners, and while higher-income earners will experience less tax savings, they also have some relief on marginal taxes to look forward to.

While a percent increase in the capital gains tax inclusion rate was announced, it translates to a less than 3 percent increase in actual personal income tax. – Rakesh Seethal, the head of employment taxes and tax risk, Barclays Africa


* The sugar tax will in principle support human health. This will lead to a decline in sugar usage, resulting in lower domestic sugar prices, which will have a negative impact on the sugar industry. – Ernst Janovsky, Absa senior agricultural economist


* The Steel and Engineering Industries Federation of Southern Africa (Seifsa) welcomes announced efforts to reduce government expenditure, but remains concerned about the lack of concrete plans to address slow economic growth.

The Budget indicated that the primary balance (current expenditure vs income) will be positive from this budget period onwards.

These are welcome but high targets to meet. If achieved, this Budget may indicate a turning point. Notwithstanding the government’s concrete plans to cut its expenditure significantly, Gordhan’s speech lacked solid measures to improve domestic demand.

Much has been achieved by this Budget, although uncertainties abound. Much more needs to be done to change course on complimentary policies that are inhibiting growth and investment. World economic recovery will happen, but whether South Africa will be part of such a recovery rests a great deal on its own efforts. – Seifsa chief economist Henk Langenhoven


* The announcement that the general fuel levy will be raised by 30c/litre to R2.85/l for petrol and R2.70/l for diesel, effective April 6 is going to have a major impact on not just motorists, but on the economy as a whole. While budget increases were reasonably equitable, the immediate future for consumers looked dismal.

Consumers with heavy debt loads were going to feel the increase in the fuel price the worst. – Neil Roets, Debt Rescue chief executive



Be sure to follow #Budget2016 developments on Business Report as we bring you news, reviews, analysis and opinion regarding Finance Minister Pravin Gordhan's speech on February 24 and 25.

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