What the MTBPS means for consumers, investors
Economist Arthur Kamp at Sanlam Investments says that, in the face of high unemployment and low economic growth, it would be counterproductive to increase taxes that are already high, and the government acknowledges this.
However, Mboweni’s Budget speech in February this year did mention more tax increases to come, so consumers will have to wait until February next year to find out for sure whether or not they will be obliged to pay over a larger portion of their hard-earned income to the state in the 2020/21 tax year.
Tax revenues are lagging, mainly because of the sluggish economy, but also because of inefficiency in tax collection by the South African Revenue Service (Sars).
Mboweni plans at least to improve revenue collection by allocating additional funding to Sars.
But the main task facing the government is trying to cut its ever-rising spending, particularly on the wage bill of a bloated and overpaid civil service, where more than 29000 employees earn more than R1million a year, and on the servicing of debt, which, on the current trajectory, will take a bigger chunk of the budget than health and economic development in three years’ time, according to Mboweni’s statement.
While the minister reminded Parliament that the specifics of the government’s plans would have to wait until February, he did announce cost-cutting measures, such as freezing the salaries of Cabinet ministers and MECs, and capping expenditure on new cars at R700000 per vehicle.
Kamp says that cost-cutting efforts in some areas are being negated by demands from elsewhere, such as bailouts for Eskom and other state-owned enterprises (SOEs).
Many commentators were disappointed that Mboweni had not made a bolder commitment to austerity.
Patricia Williams, tax partner at law firm Bowmans, said: “Minister Mboweni correctly identified the problem when he said, ‘our problem is that we spend more than we earn’. However, the financial projections demonstrate that he is not addressing this problem.
“The (stated targets are) wholly inadequate. Even without taking into account any further financial support for Eskom or other SOEs, the predictions of gross debt over the medium term are dire How can our plans of fiscal austerity be for South Africa to keep overspending?”
Kamp says that, with debt projections being higher than expected, there will be upward pressure on interest rates, making it difficult for the Reserve Bank to cut rates despite lower inflation figures.
For investors fearful of a downgrade to junk status by credit rating agency Moody’s in light of the economic projections to come out of the MTBPS, Kamp says he does not believe the agency will downgrade South Africa this year, but does not rule out a downgrade next year.
Isaah Mhlanga, executive chief economist at Alexander Forbes, says: “We expect Moody’s to change the outlook on South Africa to negative from stable (this week) followed by a downgrade in 2020. Bond yields will likely rise and the rand will weaken against the US dollar. However, the bond markets and currency markets appear to have already priced in a potential negative credit rating action.
“Markets will likely recover over the next 12 months, depending on the speed of implementation of growth-boosting economic reforms. In the absence of these reforms, any sell-off in markets will likely constitute a re-rating of South Africa’s risk assessment.”