Finance Minister Pravin Gordhan tables his budget in Parliament on Thursday in a turbulent political context in which markets and ratings agencies are watching whether the minister himself will survive in office as closely as they will be watching the numbers he will present.
All three major credit-rating agencies have SA on negative outlook for a downgrade, which could take it down to sub-investment grade (junk) status. They have warned any retreat from the government’s commitment to bring down the deficit and stabilise the level of public debt by 2019/20 would be a cause for concern.
All three have cited concerns about SA’s political tensions and infighting and what that might mean for policy stability as a negative for the ratings, with SA’s very weak growth outlook.
The narrative of Gordhan’s budget speech will also be closely scrutinized. He is expected to talk about "transformation" but to emphasize the need for inclusive economic growth.
Gordhan is expected to provide details on Wednesday on the R28bn of extra taxes he has already said he will have to raise in the 2017/18 fiscal year, to make up for the shortfall caused by a weak economy.
He will be revising his forecasts for growth and revenue over the next three years and crucially, will update the projected deficits and debt ratio.
While some economists believe his October forecasts are roughly on target, some such as PWC expect a further shortfall while others such as Efficient Group’s Dawie Roodt predict Gordhan will do almost R7bn better on revenue than October’s prediction.
In October he had to revise down growth forecasts and push out the date by which the public debt would stabilise, cutting the government’s self-imposed spending ceiling and pencilling in additional tax measures to deliver a "measured fiscal consolidation" that would halt the rapid rise in the government’s debt service costs, which are rising at more than 10% a year and consuming resources that could otherwise be used for pro-poor spending or infrastructure investment.
Macquarie economist Elna Moolman said she expected the government to remain on the fiscal consolidation path set out in the October 2016 medium-term budget policy statement.
"We do not expect any overspending or material new spending programmes, and tax revenue performance seems to be on track. We therefore expect the government will implement the R28bn of mooted tax hikes in the upcoming budget to ensure that the main fiscal forecasts remain unchanged.
"The longer-term problem remains that, unless the economy grows more than at least 2.5% per year (or corruption and wasteful spending is cut dramatically and the savings not reallocated), the tax burden on the existing tax base would have to continue to rise significantly even before introducing any further socioeconomic upliftment programmes and sufficient critical infrastructure investments," Moolman said.
With the government’s net debt forecast to rise from 45.8% in 2016/17 to a peak of 47.9% in 2019/20, one milestone towards fiscal consolidation is to achieve a primary budget surplus — where the government brings in enough revenue to cover its non-interest expenditure so it does not keep increasing borrowing, with a primary surplus expected in the 2017/18 fiscal year for the first time since 2008.
Much of the focus of the tax community has been on which taxes he will use to bring in the extra revenue needed. An increase in the value-added tax rate is considered unlikely, because it would be politically risky, and the company tax rate is unlikely to increase too, so the burden is likely to fall mainly on personal income taxes, particularly at the upper end of the income scale, with other "indirect" taxes such as the fuel tax also looked to for revenue. Detail on the proposed sugar tax is also expected.
In October, Gordhan revised down his growth forecast to 0.5% for 2016 and 1.3% for 2017 and though some, such as the International Monetary Fund, have lower forecasts, some economists now expect that growth in 2017 could be a little higher thanks to a bounce in commodity prices.
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