Budget could sway SA’s sovereign rating

2013-02-26 16:15
Cape Town - Finance Minister Pravin Gordhan must walk a tightrope to win the confidence of international investors and credit ratings agencies, an economist says.

"International investors and credit ratings agencies will be paying close attention to this year’s 2013/14 budget to assess if South Africa remains committed to a responsible fiscal policy," said Johann Els, senior economist at Old Mutual.

Els said high focus will be placed on whether the government’s approach will keep increasingly threatening slower growth, rising inflation and higher spending requirements at bay.  

Rating agencies have warned that the country’s sovereign credit rating could be in for more cuts if the budget deficit widens much further.

"The budget deficit target for the new 2013/14 fiscal year has experienced significant slippage since it was first projected three years ago," said Els.

It was originally forecast at -3.2% of gross domestic product (GDP), and most recently worsened to -4.5% of GDP due largely to lower-than-expected revenue collections and rising fixed spending for wages and social grants.

"We now estimate that the budget deficit for the 2013/14 fiscal year will widen to approximately –R167.0bn, or 4.7% of GDP, from its previous target of -R161.3bn or -4.5% of GDP.

"This makes a shortfall of R5.7bn that needs to be filled if treasury is to stick to its deficit target of -4.5% of GDP," said Els.

He pointed out that individual and corporate income tax receipts for the current year are also well behind targeted growth.  

Individual tax is at 10% year-on-year (y/y) growth versus an expected 12.6%, while corporate tax is at 5.0% y/y growth compared to the expected 9.6%, said Els.

Given the impact of rising inflation and slower real household income growth, there are likely to be further downward revisions to the GDP and consumer spending growth forecasts from the October 2012 medium-term expenditure framework, added Els.

He said "while treasury had forecast GDP growth at 3.0% for 2013 and 3.8% for 2014, we now expect these to be revised downward to around 2.7% and 3.5%, respectively".

"At the same time, household consumption expenditure is likely to be revised downward from 3.5% to around 2.9% in 2013, and from 4.0% to 3.7% in 2014."

Els explained lower growth means that revenues will likely remain under pressure, further increasing the likelihood of future tax hikes.

If treasury allows the budget deficit slip further to an estimated -4.7%, it could be a potentially dangerous move given the concerns of international investors and credit rating agencies, Els warned.

"The risk is that SA’s sovereign rating could fall further, making interest rates on government debt much more expensive and creating further costs for treasury," said Els.

"Treasury is more likely to keep the existing deficit target of -4.5% of GDP in place, to signal its adherence to a strict fiscal policy, and opt for additional taxes to close the R5.7bn shortfall for the 2013/14 fiscal year," he said.

Els predicted much bigger hikes in indirect taxes like the fuel levy and “sin taxes” on alcohol and tobacco than previous years.

He also raised the possibility of a super tax on high income earners.

"There is a possibility of a hike in the top marginal individual income tax rate. A 2.0% increase in the rate for those earning more than R1m per year would raise an extra R4bn," Els said.

Currently about 102 000 people, or 1.7% of individual taxpayers, earn more than R1m.

The government is not likely to raise both individual income tax and VAT rates, but one or the other could materialise, he said.

Els also noted there will likely be no changes to corporate taxes, but he did mention possible "green" taxes being announced.

Gordhan is expected to be much less generous this year than in previous years, but lower-income earners are likely to benefit the most from any tax relief, according to Els.

* Visit our 2013 Budget section for full coverage of Finance Minister Pravin Gordhan's National Budget speech.

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