Mini budget 2016: Hopes and prayers

2016-10-30 07:00 - Dewald Van Rensburg
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Finance Minister Pravin Gordhan.

Treasury’s forecast for economic growth, which forms the basis of this week’s entire medium-term budget policy statement – known as the mini budget – has struck some analysts as being hopelessly overoptimistic.

The forecast for GDP growth this year was lowered from 0.9% to 0.5%. More importantly, it was projected to be 1.3% next year and 2% the year after that.

Early this month, the International Monetary Fund put South Africa’s economic growth this year at 0.1%. And, according to the organisation’s World Economic Outlook – a semi-annual compendium of forecasts – targeted growth will be 0.8% next year.

Also earlier this month, the SA Reserve Bank said it expected 0.4% growth for 2016 and 1.2% next year – still marginally lower than Treasury’s view.

At least one private consultancy slammed Gordhan’s high hopes.

UK-based Capital Economics said it expected actual growth to be “far below the government’s forecasts”.

On the domestic front, private forecasts are also lower than those of Treasury. FNB, for instance, predicts 0.2% growth this year and 1% next year.

A lower growth forecast almost automatically leads to lower tax revenues, a higher budget deficit, less spending and more borrowing.

Finance Minister Pravin Gordhan told journalists at a media briefing preceding his mini budget speech on Wednesday that the deficit figures given are “very credible”.

“It is a matter of the religion you belong to,” said Iraj Abedian, an economist at Pan-African Capital Holdings.

“The assumptions are different. Treasury believes itself where others do not,” he said of the varied forecasts.

“If you are a cynic, you would say that Treasury’s forecast is higher, because that is the only way it can get the deficit lower. It is realistic if Cabinet plays the game, so to speak.”

According to Abedian, the forecasts not only require a laundry list of economic reforms, but also that government stop contradicting itself, and act decisively against the abuse of resources.

When it comes to the plan for the realignment of SAA’s shareholding, “it is hard for the ministers to keep up, never mind the public”, said Abedian.

“There is a lot of stuff that cannot just be reduced to structural reforms.”

In his address, Gordhan said the 2017 growth rate could be even higher than the one forecast – if the numerous “structural reforms” currently making their way through government, courts and task teams reached the light of day.

Among these are the settling of critical policy questions, such as how black ownership actually works under the Mining Charter, and how South Africa is going to allocate the radio frequency spectrum which will be freed up when the analogue television signals get cut off. Both questions will determine the control of valuable natural resources into the foreseeable future, determining investment decisions.

Gordhan also stressed the package of labour market reforms sitting in Nedlac – the consensus-seeking body comprising government, business, labour and civil society – which include controversial attempts to limit strikes as well as setting a national minimum wage. “We are all aware it is necessary,” he said of the wide-ranging policy changes potentially affecting the economy next year.

The mini budget provides targets for the next three years’ spending by government. According to this week’s budget address, it is not just that GDP growth has fallen below expectations, but that the composition of GDP growth has changed as well, in a way that exacerbates the effect on tax.

Domestic expenditure dropped “precipitously” and, while this was offset by fewer imports, the effect is still a “significant reduction in all taxes”.

This year, taxes are estimated to fall R22.8 billion short of the target announced in February’s Budget Review document.

Next year the shortfall is expected to be R36.8 billion, and by the 2018/19 financial year, the gap will grow to R51.9 billion.

These figures assume that Gordhan’s growth rates materialise.

Key Budget Moves:

  • Treasury made its by now traditional attack on the state wage bill and repeated its past calls for government employment to be reduced through natural attrition. 
    The current wage deal in the public sector expires in 2018 and Treasury has again budgeted for a probably unrealistically low increase in wages. 
    Treasury only allows for a 6.9% increase a year for the next three years – even though this year, the increase amounts to about 8.9%. 
  • The childcare grant is getting increased to partially offset this year’s high food inflation. It will rise from R350 to R360 a month. There are about 12 million child grant beneficiaries, which means the R10 increase will cost an additional R120 million a month. 
  • Interest payments continue to be the fastest-growing item in the budget, totalling R147.7 billion in the current year – and projected to grow to R197.2 billion by 2020. 
  • The exchange rate this year caused payments to the department of international relations and cooperation to rise by R950 million. 
    The cost of South Africa’s foreign missions is a likely target for cuts next year. The medium-term budget policy statement calls the cost-of-living allowances for diplomatic staff “exceptionally generous”. These amount to between R600 000 and R1.3 million per person – excluding their salaries, accommodation and other allowances.

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