Budget 2023
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Budget 2014: Pravin vs Manuel

Cape Town - In what was the 20th Budget of the democratic era, Finance Minister Pravin Gordhan faced a massive challenge.

The reality is that everybody – taxpayers, citizens, local and global investors, corporates, ratings agencies and fellow Cabinet ministers – all had high expectations of what the Finance Minister should deliver.

He cannot please everyone, and that makes him very unpopular at times.

When Trevor Manuel was Finance Minister, a booming economy and increased efficiency in tax collection meant there was scope to expand welfare spending, while cutting corporate and individual tax rates. But now the economy is stuck in second gear.

Five years ago, emerging markets such as South Africa were praised for having smaller deficits and lower debt ratios than the developed economies.

This situation has changed. South Africa’s deficit is now comparatively larger as a percentage of gross domestic product (GDP) than the US’s deficit, and the market’s leniency towards emerging economies with deficits has come to an end.

Capital that was once freely available to emerging markets with large external funding needs, such as South Africa, is now scarce. This caused several key emerging markets’ currencies to slump and bond yields to spike.

The increase in bond yields over the past year means that any future borrowing, including rolling over existing debt, will be done at higher interest rates. Already, Government expects to spend R121bn in this fiscal year on servicing debt (compared with R144bn on social welfare).

Economic outlook uninspiring

The performance of the economy is the starting point for understanding the Budget, as it is the economy that has to deliver the tax revenue that Government spends.

How Government spends its money also impacts how the economy performs. The real economic growth outlook has been downgraded to 2.7% in 2014 and 3.2% in 2015.

Inflation is estimated at 6.2% in 2014 and 5.9% in 2015. Household consumption growth is expected to be sluggish at 2.8% in 2014 and 3.2% in 2015.

Tax revenue growing faster than the economy

Despite the sluggish economy (real growth of only 2% in 2013), tax revenues have been relatively buoyant, and Government expects to have collected R1bn more in the 2013/14 fiscal year compared to what was expected.

Companies’ tax came in ahead of target by R7.1bn, more than offsetting value added tax (VAT) that came in below target by R3.7bn.

The budget projects revenue to grow by 8.6% in 2014/15 and 9.9% in 2014.

Tax revenue is expected to grow faster than the economy over the medium term, meaning the total tax burden on the economy will rise: Tax revenue as a percentage of GDP will rise from a low of 24.4% in 2009 to 26.5% in 2016/17.

Good news for taxpayers is that R9.3bn in income tax relief has been granted to compensate for the impact of inflation (fiscal drag).

This will be offset by R4.7bn increases in indirect taxes.

Brakes placed on spending

Government's non-interest expenditure is expected to be R1.05trn in 2013/14, rising to R1.31trn in 2016/17.

Having grown sharply over the past decade, spending is projected to only grow on average 1.9% per year above inflation over the next three years, slightly lower than what was announced in the October mini-budget.

Spending will be about R3bn lower than what the Minister said he would spend three years ago.

Spending will also be slower than overall economic growth, meaning that Government will be a drag on the performance of the economy over the medium term.

However, over the longer term, getting spending under control is crucial for maintaining the sustainability of Government’s finances and for maintaining credibility in the eyes of the market and ratings agencies.

Importantly, spending on infrastructure will grow at 4% above inflation over the budget period, suggesting an important shift from current to capital spending.

To further signify commitment to sound finances, Government has drawn a line in the sand by introducing an “expenditure ceiling”.

This means government non-interest spending cannot breach R1.03trn in 2014/15, R1.11trn in 2015/16 and R1.18trn in 2016/17.

Any new spending plans introduced will have to be offset by cuts in other areas.

Government’s wage bill is projected to grow by 6.8% over the next fiscal year, and 6.6% the year after. Social grants will also grow slightly above inflation over the next year.

Deficits and debt to stabilise

Putting the tax revenue and spending numbers together, the budget deficit is projected to be 4% of gross domestic product (GDP) in the 2014/15 fiscal year.

This is lower than the October mini-budget forecast. The deficit is expected to fall to 3.6% in the next fiscal year and 2.8% in 2016/17.

The ratio of total government debt to GDP is expected to peak at 45%, up from 29% in 2009.

Good but not outstanding

Gordhan spoke at length about the National Development Plan, but it will be implemented by the next administration.

The speech was thus devoid of detail on economic reforms, even as the Minister stressed the need to get the economy growing and specifically to get small business growing.

But the Budget was also devoid of populist rhetoric in an election year.

All in all, it was a credible, but unexciting budget. The Minister had no choice but to reduce the budget deficit, and he delivered.

The lower projected deficits should ease pressure on the rand and interest rates in time.

It also creates longer-term space for Government to respond to future economic crises.

The hard work is now to get the various government departments and agencies to spend their allocations effectively and to cut waste and corruption.

* Dave Mohr is a wealth chief investment strategist at Old Mutual.

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