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Cape Town – National Treasury should have undertaken more expenditure consolidation in the light of growth risks, higher education and healthcare costs and forthcoming equity injections into state-owned entities (SOEs), said Peter Attard Montalto, emerging market economist at the Japanese bank Nomura.
Commenting on Finance Minister Pravin Gordhan’s 2017 Budget Speech, Attard Montalto said there is now “virtually nothing left in the revenue store” in South Africa’s budget.
“The future holes in the budget and in growth are of high probability and quite likely,” he said, and for this reason he branded the budget “threadbare”.
Montalto said the growth expectations expressed by Gordhan are still too optimistic and the budget should have focused more on the need for more difficult decisions on expenditure, with significant cuts in irregular expenditure still required.
“We are concerned by the step-up in contingent liabilities, and while ratings agencies view the budget as ‘OK’ they are likely to focus on this and the risks to growth.”
The driver of contingent liabilities is partly Eskom, whose liabilities are close to R265bn in 2018/19 in this year’s budget from R215bn in the 2016/17 budget.
The Road Accident Fund is at R239bn from R183bn in the previous budget.
“This means that contingent liabilities (excluding independent power producers) will now peak at 15% of GDP in the coming fiscal year compared to R13.5% of GDP previously. This is meaningful and negative for South Africa’s sovereign credit rating,” Montalto said.
Future value-added tax (VAT) hikes, Montalto opined, have practically been spent on higher education and funding for the planned National Health Insurance and won’t be available for general budget financing.
“Overall while existing taxes can clearly always be hiked, there is only VAT really left in the fiscal cupboard,” Montalto said, “which makes the fiscus’ ability to take future further shocks look somewhat threadbare.”
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