Short Note 25 February 2016
A Startlingly Mild Budget
No major bold strategic moves. Instead, promises of spending reductions, procurement savings and tax increases allowing measured budget deficit reduction, and some budget reprioritisation, while shielding the little growth still left in the economy.
There is an attempt to address rating agencies and business concerns, also through as yet vague State Owned Enterprise reforms, while mainly keeping the electorate broadly satisfied, with any higher burdens mainly carried by higher incomes, keeping the redistribution focus instead of strengthening supply side incentives. The political imperative keeps trumping the economic one.
The budget adjustments are phased in over three years.
Government spending curtailment (relative to Nene ceiling) of R25bn, achieved through R10bn reduction in compensation budgets in 2017 and a further R15bn in 2018 (though the net effect over three years is only R16bn due to a higher interest bill and contingency reserve). Intended procurement savings of another R25bn through better centralised systems.
Tax increases of R18bn this year, a further R15bn next year and another R15bn in the subsequent year.
Thus a budget shift of R89bn in three years, half contributed by reduced outlays and half by tax increases.
Budget reprioritisation frees up R32bn over three years, half allocated to higher education to pay for fee freeze, and a third allocated to funding our share of the new BRICs bank. Minimal drought relief to the extent identified (R1bn, if that much, indicative of political priorities?).
The R18bn tax increase this year comes in three parts: fuel levy (30c/l) and excise taxes +R9.5bn; only a third of full bracket creep relief granted, thus implying an effective income tax increase of +R7.6bn (mostly contributed by incomes above R400k) though with medical tax credit increase of R1.1bn; and capital gains tax and transfer duty +R2bn. Thus keeping the redistribution focus alive while denying the need to strengthen supply side incentives.
As to the R15bn tax lift in 2017 and another R15bn in 2018, various options are mentioned (but to be decided then), such as further income tax bracket creep relief denied, increase in marginal income tax rates, a new personal income tax bracket, an increase in VAT or other taxes. Again redistribution front of mind, supply side incentive strengthening not to the forefront.
Meaning, this year’s intense guessing game regarding tax hits to be still twice repeated, with as much chance of getting it right?
Effectively, by only granting one-third bracket creep relief, Gordhan lifts the real bite of income tax on incomes over R400 000, a similar amount comes from fuel levy & sin taxes for all working people and a bit more comes via wealth taxing with capital gains (going from 33% to 40% of gains added to income) and on property transfer taxes (value over R10m going from 11% to 13%).
What does he buy with all this “pain”? A stay of execution, also known as an election budget, while not quite convincing either business or rating agencies?
A very gradual deficit reduction, from 4% of GDP last year to 3.2% this year, aiming for 2.4% in 2018, slowly from here onward building up a small primary surplus offering not much of a buffer in uncertain times.
This budget shouldn't weaken growth unduly (with petrol prices cut next week by nearly 70c/l?). But where is the higher growth these next two years supposed to come from, growth projected as rising from 0.9% this year to 1.7% next year and 2.4% in 2018?
Will higher growth follow because state owned enterprises will be better governed, phased out or merged, and (some) use made of more private infrastructure funding (unspecified)? Has business seen the light and will be rushing into faster spending?
Talk of improved business confidence and follow-through appears to be hope-based and a tad premature rather than well founded, seeing that nothing else has changed in the greater political paradigm, either.
Finance minister Gordhan did not sink growth. But the initial market reaction via bond yields and Rand was negative (though coinciding with Brazil downgrading by Moody's). It is for rating agencies and markets to indicate in coming months whether enough has been done by us to delay junk, or even deflect it.
Some market observers continue to suggest junk is inevitable this year.
Bruggemans & Associates, Consulting Economists
Short Profile Dr CW Bruggemans
Chairman, Bruggemans & Associates Consulting Economists
Consulting Economist, Avior Capital Markets
Consulting Economist, Ince (Pty) Ltd
Consulting Economist, Hellmann Logistics (Pty) Ltd
Consulting Economist, Bureau for Economic Research (BER), Stellenbosch
Honorary Professor of Economics, University of Stellenbosch