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Johannesburg - The most eagerly anticipated feature of this year’s National Budget is the tax policy adjustments that government will introduce, according to economist Alex Smith of FNB.
In the 2014 mini budget Finance Minister Nhlanhla Nene announced a prudent plan to reduce the expenditure ceiling further and adjust tax policy in order to generate additional revenue.
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Government’s financial position has deteriorated markedly since the onset of the global financial crisis, according to Smith.
If Treasury reduces its nominal GDP growth forecasts at the National Budget, it is likely to cut its revenue forecast as well, in his view. This is because nominal GDP is a key determinant of revenue.
"A further revenue disappointment is unlikely to go down well with rating agencies, so government may be forced to increase taxes by more than expected to cover the shortfall," says Smith.
"This decision will depend to a large extent on whether government is able to reduce expenditure growth as inflation falls."
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Net public debt as a percentage of gross domestic product (GDP) has almost doubled from 21.8% in 2008/2009 to 38.1% in 2013/2014.
"In response to the rising debt load National Treasury has, for the past three years, adhered strictly to its nominal expenditure ceilings. However, revenue shortfalls and GDP growth disappointments have consistently resulted in upward adjustments to its debt-to-GDP projections," said Smith.
Short-term targets and risks
Treasury appears to be broadly on track to meet its 2014/2015 budget deficit projection of 4.1% of GDP (based on the old estimates of GDP). With GDP having been rebased recently, the equivalent 2014/2015 budget deficit estimate should be approximately 3.9% of GDP.
Growth in revenue and expenditure relative to the targets set out in the mini budget. (Source: National Treasury, FNB)
Expenditure growth has come in slightly below Treasury’s forecasts at 8% year-on year (y-o-y)) for the first nine months of the current fiscal year. With inflation set to slow further over coming months and the petrol price significantly lower, FNB thinks government will comfortably meet its spending target.
"Tax revenue growth has been tracking marginally below expectations. This is being driven by a weak corporate tax take and falling revenue from customs duties," said Smith.
"Meanwhile, personal income tax and VAT have surprised to the upside. We expect VAT revenue to grow further in the final quarter of the year, on higher household spending. Revenue from customs duties should also increase due to slightly larger import demand."
During the 2015/2016 fiscal year, government’s revenue and expenditure targets are more ambitious as a result of the fiscal consolidation package announced in the mini budget, according to Smith.
Expenditure growth is forecast to slow from 8.5% y-o-y to 7.6% y-o-y. Meanwhile, tax revenue growth is set to rise from 9.3% y-o-y to 11.3% y-o-y.
Public wages risk
"We think government’s expenditure target is credible, given the fact that inflation is set to fall significantly in 2015. In other words, government can maintain its real spending growth targets and actually reduce nominal spending growth to around 6% y-o-y in the coming fiscal
year," said Smith.
"However, the ongoing public sector wage negotiation poses a major risk to the fiscus as wages
account for more than a third of public spending."
Government has only allowed for roughly CPI + 1% wage increases in the mini budget. With the inflation decline government may have some additional breathing room during the wage negotiations.
"Nevertheless, if the wage settlement is well in excess of inflation, the public sector headcount will need to be reduced or other spending programmes cut in order for Treasury to meet its deficit target," warns Smith.
"On the revenue side there are also fiscal risks. This is because nominal GDP is likely to come in lower than the mini budget forecast for both 2015 and 2016."
(Source: National Treasury, FNB)
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