Cape Town – Although the medium-term budget policy statement is merely a revision of the February Budget, the fractious political backdrop against which Finance Minister Pravin Gordhan will deliver it on Wednesday will override everything else.
According to Gina Schoeman and Adriaan du Toit, economists from global bank Citi, attention will be fixed on comments about the #feesmustfall tertiary education protests, the nuclear build programme and “Gordhan’s hard line” on the mismanagement of state-owned entities.
READ: Matthew Lester seeks #feesmustfall solutions: the forgotten stakeholders
“An unambiguous positive turn on the political front could boost South Africa’s assets significantly,” the two economists said, “but until that happens, we think it’s sensible to remain neutral about the rand and South African government bonds.”
The purpose of the mini budget is generally to provide an update on February's national budget, because the underlying macroeconomics and budgetary conditions may need to be revised.
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But this year’s mini budget is more critical than ever, for two main reasons – credit rating reviews which will take place on November 25 (Moody’s) and December 2 (Standard & Poor’s), and the political backdrop against which the delivery will take place, given pending fraud charges against Gordhan.
Revenue collection
To date, total gross tax revenue collection is below historical levels, said Schoeman and Du Toit. “This shouldn’t be too surprising, given the poor state of domestic demand in the economy. Data for April to August 2016 shows that 36.3% of the estimated 2016/17 gross tax revenue has been collected, versus a six-year average since 2010 of 37.1%.”
Under-collection this year is attributed to personal income tax (37.2%) and value-added tax (VAT), where only 38% has been collected.
Expenditure
The two economists, however, are of the view that expenditure is not at risk of running ahead of February’s estimates.
“We forecast the consolidated budget balance to gross domestic product ratio at -3.3% this fiscal year, from an estimate by Treasury in February 2016 that it would be -3.2%. This is slippage of R3.5bn.”
The Citi economists predict an R11.4bn deficit for the 2017/18 budget, rising to R16.3bn in 2018/19.
However, if the expenditure ceiling were lowered further by R23bn over the medium term, National Treasury could meet its targets for a lower budget balance to GDP of -2.8% in the outer years.
Tax hike could be in the offing
Schoeman and Du Toit believe a hike in VAT is unlikely, as the “socio-political response” to such an increase could be negative. There is also an economic repercussion with a 1% VAT hike pushing the 12-month consumer price index higher, which again infringes on household disposable income growth and as a result on GDP growth.
Another rise in personal income tax could be on the cards, although of about 1% across all income ranges. “Against this, we do not believe there is appetite yet to implement an additional ‘super wealth income tax bracket’,” said Schoeman and Du Toit.
READ: Taxes may rise for wealthy in mini budget, says expert
“We think the credibility of Wednesday’s medium-term budget should loosely be linked to the probability that Mr Gordhan will remain in his position over the next 12 months or so. This probability (that Gordhan will stay) seemed to edge higher in the wake of the most recent developments, but it keeps oscillating around 50%, in our view," the two economists said.
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