Budget crucial to revive the economy – analysts
DURBAN - FINANCE Minister Tito Mboweni’s budget is expected to continue demonstrating a commitment to a stable financial system to revive the economy and encourage investment, according to banking analysts.
Nedbank economist Isaac Matshego said the banking sector was important for credit intermediation and banks played a role in facilitating the financing of the budget deficit.
With private sector investment having contracted since 2016, Nedbank expected Mboweni’s budget speech to set a base, which would help to revive investment in the country.
“We expect the Finance Minister to present a budget speech that creates a conducive environment for business in general. A Budget that helps to revive the economy will help businesses to recover and the job market to stabilise. Ideally, the focus should be on helping to restore the jobs that were lost during 2020,” said Matshego.
In its 2021 Budget preview released last week, Standard Bank said the latest disaggregated tax revenue data showed a year-to-date contraction in gross revenues of 10.6 percent year-on-year compared with the latest Treasury forecast for a 17.9 percent contraction for the full fiscal year.
Standard Bank’s senior economist, Elna Moolman, said the simple extrapolation of the year-to-date trends (adjusted for seasonal patterns) implied revenue out-performance of up to R110 billion, though in their view this did not adequately adjust for factors such as the exceptional commodity price boost to December’s company income tax revenues and the likely further recovery in VAT refunds.
“Treasury too should in our view err on the side of caution as any optimism would unduly increase pressure for extra social and/or wage spending, although the budget deficit remains very wide, notwithstanding the large revenue overrun, and the merits of fiscal consolidation and wage bill restraint remain unchanged,” said Moolman.
Standard Bank said it assumed that the government’s 2020/21 financial year tax revenues should outperform.
Moolman said personal income tax contracted 9 percent year-on-year to date, moderately better than Treasury’s forecast of a 13.9 percent contraction for the full fiscal year, which pointed towards probable outperformance of the budget forecasts.
“Even if we adjust household disposable income for the boost from additional social grants and Ters receipts, it didn’t contract nearly as much as the government's estimate for personal income tax (this is also relevant for compensation of employees. We maintain our view that the strong bias in job cuts towards the lower-income groups implies a disproportionately small impact on aggregate measures such as total tax or total consumption relative to the large number of jobs lost.”
According to the bank's Budget preview, company income tax contracted 11 percent year on year in the fiscal year to December 2020 well ahead of Treasury’s 24.6 percent contraction forecast for the full fiscal year.
Absa Group senior economist Peter Worthington said in its Budget preview that the budget would be absolutely critical because South Africa’s fiscus was in deep trouble in part to the Covid-19 pandemic, which generated existential spending pressures and caused tax revenues to plunge, as gross domestic product recoiled in the biggest contraction since World War 2.
“However, it is important to remember that South Africa was skirting the edges of a debt trap even before the pandemic erupted, with the government persistently over-forecasting growth (and hence tax revenues), leading to expenditure plans that were based on unrealistic tax collection expectations,” said Worthington.