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Cape Town - The headline National Budget which Finance Minister Nhlanhla Nene will present on Wednesday is unlikely to deviate much, but lower growth poses a challenge going forward, according to Sanisha Packirisamy, an economist at Momentum.
"Last year’s mini budget set the bar for fiscal prudency against a challenging economic backdrop. In light of a deterioration in global growth and subdued commodity prices, National Treasury’s credibility to ensure medium-term fiscal sustainability remains at stake," said Packirisamy.
"While government’s proposed fiscal package to raise additional revenues of R25bn and cut expenditure by R27bn over the next two years sent a positive signal to the market, more may need to be done to meet medium-term targets and avoid pressure on issuance further down the line."
READ: Mini budget - as it happened
Increased pressure
In her view softer global growth expectations, weak commodity prices and domestic energy supply constraints are likely to trigger marginal downward revisions to Treasury’s real gross domestic product (GDP) growth forecasts from its mini budget projections of 2.5% in 2015 and 2.8% in 2016.
As a result, revenue collections, particularly further down the line, could come under increased pressure.
"Meanwhile, this year’s headline budget deficit is unlikely to deviate much from the mini budget forecast given that lower-than-expected revenues are likely to be met with lower expenditure levels," said Packirisamy.
"Furthermore, thanks to a favourable boost to nominal GDP on the back of the latest national accounts revisions, the budget deficit ratio (relative to GDP) could even come in slightly better than October 2014’s projections."
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Tax policy changes unlikely
In her view major tax policy changes are unlikely this time around, but pose a medium-term risk.
"Tax policy adjustments, including a potential VAT hike, are still likely over the medium term, especially in light of lagged expected poor performance in corporate taxes as a result of energy supply pressures," she explained.
On a fiscal year-to-date basis, fuel levy collections are above target and personal income taxes are outperforming thanks to above-inflation wage settlements. VAT and excise duties are also in line.
Corporate taxes
"Corporate taxes and custom duties, however, are coming in below budget targets with offshore earnings only partly offsetting the benign domestic environment. Nevertheless, policy and administrative reforms, reduced compensation for fiscal drag, potential hikes to the fuel levy (in light of lower oil prices) and small cuts to government’s outlay on goods and services spend are likely to get the budget back in line this year, in her view.
"We do not expect any significant changes to corporate taxes other than closing tax loopholes. SA’s corporate tax rate ranks reasonably high on an international comparison and increasing this rate could dissuade investment into the country," she said.
"While we believe the chances of a VAT increase in the upcoming budget have lessened, this is likely to be used as an additional revenue source further down the line."
READ: Corporate tax lifts head from recession
Higher electricity tariffs
The weak state of several of SA’s SOEs’ balance sheets - like Eskom and SAA - could require further support from government over the medium term. The International Monetary Fund (IMF) recently ran a risk scenario involving negative shocks to SA’s medium-term growth rate and absorbing the stock of SOEs’ debt.
Under these extreme conditions, SA’s public debt-to-GDP ratio could rocket above 70% by the end of the medium-term expenditure horizon.
For now, government has committed a deficit-neutral R23bn support package to Eskom which will be raised through the selling of state assets.
"Yet, we expect higher electricity tariffs to be approved early next year given energy regulator Nersa’s decision to allow for a full pass-through of Eskom’s increased usage of the open-cycle gas turbines," said Packirisamy.
"In our view, it has become increasingly necessary for government support to failing SOEs to be accompanied by greater oversight, sound business plans and drawing on private sector resources."
READ: Eskom will return to normal in 20 months - Barnard
Ratings risk in the medium term
Although this year’s fiscal target is likely to be met, Packirisamy said placating rating agencies at the next Fitch and Standard & Poor’s review in June 2015, keeps her concerned about medium-term fiscal targets given pressure on trend growth in SA following energy constraints and labour market tensions.
Fragile SOE balance sheets, including uncertainty over Sanral’s funding model, and longer-term expenditure plans like the National Health Insurance add further pressure to SA’s debt-to-GDP trajectory.
The projected change in SA’s debt-to-GDP profile between 2009 and 2019 is expected to be the highest amongst its emerging market peers, placing even more emphasis on the need for additional measures should the economic outlook worsen, warned Packirisamy.
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