Four key signs to watch for in Budget 2017

Cape Town - There are basically four key political areas to watch in the upcoming National Budget speech of 2017, according to Peter Attard Montalto, emerging markets economist of Nomura.

The first is the political backdrop. Financial sector policy and regulations and is the key area that may be in more open conflict with the broad shift in tone from the State of the Nation Address (SONA) - and subsequent ANC rally speech and New Age Breakfast speech from the president, in Montalto's view.

"We expect the National Treasury (NT) to plant a firm flag in favour of the existing financial sector policy framework with another rallying cry on issues such as the FICA (financial crimes) bill," said Montalto.

The National Treasury (NT) was a convening force between government and the Presidency during 2016 and provided a framework for some of the commitments made by business on SME funding and internships, but could not drive fundamental reforms in wider government, according to Montalto.
 
"Since then the Treasury has lost some political oversight over parastatals to the presidential working group on state-owned enterprises. The NT has been hemmed in more to a core fiscal and budgetary role."

"The second key area will be on procurement budgets, which the SONA attempted to shift to a more transformative role. This has been a long-running issue between the NT, the ANC and the rest of government."

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Montalto thinks the NT will firmly set out the legal and constitutional constraints on a more aggressive transformative procurement policy, highlighting where this does not work and is causing issues.

A third key political issue to watch will be tertiary education fees. The NT is awaiting the outcome of the Fees Commission before undertaking larger expenditure changes paralleled by funding wrappers – though the risks to the fiscus are likely to be highlighted in the speech.

At this stage Montalto thinks a coded political response to the SONA will be very much rhetoric only and doubts there will be any shift in either direction on policy in these areas in Budget 2017.

The fourth key issue for Montalto is fiscal loosening or departments wanting more money. He believes the NT retains significant control over the departmental budgeting allocation process and as such surprises in allocations are unlikely to occur and there is unlikely to be a surprise breach of the expenditure ceiling.   

The fundamental issue regarding Budget 2017 will be the medium-run forecast for per capita income growth, where there is likely still to still too much optimism, according to Montalto.  

"We expect the budget to do the minimum amount necessary as opposed to the ratings constraints again, and while we expect National Treasury to be more constrained in wider policy areas than in the past year, we still see it retaining full control of the fiscus," said Montalto.

Micro fiscal level

At the micro level the key issue for Montalto in Budget 2017 will be what he calls revenue-side adjustments. He thinks a 1 percentage point increase in VAT will have been placed on the table as an option (raising R15bn), "but rejected because it has too large a political and economic impact".

He does, however, expect a fuel levy increase at around 75 cent increase, which would raise about R17bn in revenue. He also expects a "bracket creep" in personal taxes - below inflation increases in bracket levels sweeping more income into higher rates and the possibility of a new higher income tax bracket rate.

Lastly, he expects small changes to estate duties, capital gains taxes and sin taxes.

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