BUDGET SPEECH 2017
BUDGET SPEECH 2017:
THE KEY TAKEOUTS AND IMPLICATIONS Dave Mohr & Izak Odendaal, Old Mutual Multi-Managers
Since 2009, the large budget deficits have been funded by borrowing, and an increasing share of Government’s finances is spent on servicing debt, crowding out other areas of spending. This is not sustainable.
BETTER GROWTH OUTLOOK HELPS FISCAL CONSOLIDATION PLANS
However, the task of narrowing the sizable budget deficit has been hampered by economic growth that not only slowed down, but slowed more than expected year after year. Economic growth was barely positive in 2016 and, unsurprisingly, tax revenues have been under pressure (since tax is basically Government’s claim on economic activity, it rises and falls with the business cycle). The first input in analysing the Budget is the economic forecasts on which the Treasury bases its revenue and spending assumptions. If these forecasts are unrealistic, the Budget itself loses credibility. Gross domestic product growth of 1.3% is expected in 2017, followed by 2% in 2018 and 2.2% in 2019 (Chart 1). These forecasts are unchanged from the October Medium-Term Budget (MTB), the first time in five years that growth estimates have not been cut. If commodity prices remain at current levels amid stronger global economic growth, these forecasts might be too low, in which case the task of closing the deficit becomes easier.
TAX CHANGES: WHO FEELS THE PAIN? The question on everyone’s lips before the Budget was where the Minister would get the additional R28 billion in tax revenue in the coming fiscal year and R15 billion in fiscal 2018/19. Tax revenue for the current fiscal year is also expected to be behind schedule due to a decline in tax buoyancy (the amount of tax you get for each unit of economic growth). This has necessitated the following tax increases: • A new top personal income tax bracket has been introduced for individuals earning above R1.5 million per year. This will raise an additional R4.4 billion and increase the progressive characteristic of the tax system. • The bad news for middle-income taxpayers is that there will be limited bracket creep relief of only R2.5 billion (down from R5.5 billion last year and R8.5 billion the year before).
last year) while the Road Accident Fund levy increases
DEFICIT PROJECTIONS: STICKING TO THE PLAN
by 9 cents per litre. It was proposed that the VAT zero-
As growth has declined and persistently missed forecasts since 2012,
rating on fuel be removed in 2018.
the narrowing deficit was postponed year after year (Chart 2). Given
• The fuel levy increases by 30 cents per litre (same as
• Dividend Withholding Tax (DWT) increases to 20%,
global investors and ratings agencies’ tight leash on South Africa,
which should raise R6.8 billion in additional revenue.
particularly with regard to the concerns around political interference at the Treasury leadership, there was little option to push out fiscal
• “Sin” taxes (excise duties on cigarettes and alcoholic
consolidation plans again. Sticking to the deficit targets as outlined
drinks) are to increase again, raising an additional
in the October MTBPS is therefore crucial.
The targets remain at 3.4% for the current fiscal year and 3.1% for
• A tax on sugary beverages will be implemented later
2017/18 but there is marginal slippage in the outer years with
this year once details are finalised.
the deficit declining to 2.8% in 2018/19 (previously 2.7%) and
SPENDING: CUTTING THE FAT
2.6% in 2019/20 (2.5%).
Government is sticking to the expenditure ceiling – a cap on
non-interest spending imposed in 2012. There is no further