A juggling Gordhan to walk shaky tightrope
28 January 2016
Posted by: Author: Ntsakisi Maswanganyi
Author: Ntsakisi Maswanganyi (BDlive)
As Finance Minister Pravin Gordhan prepares what will be his most difficult budget to date, there are several hot potatoes he has to juggle and he will have to navigate a tightrope while the spectre of a ratings downgrade looks a certainty.
Mr Gordhan has to contend with a widening budget deficit against a backdrop of the worst economic growth cycle since SA entered into a recession in 2009. The country is spending far more than it is earning, and the ratings agencies are keeping a close watch on whether it will rein itself in.
South Africans head to local government elections at an unannounced date this year — a terrain riddled with governance inefficiencies and the theatre of many a service delivery protest. So, it will be a bitter pill to swallow when Mr Gordhan is forced to divert money away from service delivery programmes to pay for the country’s bulging budget deficit.
Former finance minister Nhlanhla Nene predicted last year that the consolidated budget deficit would narrow to 3.3% of gross domestic product (GDP) in the 2016-17 fiscal year, from 3.8%.
The current fiscal year ends in March and a new one starts in April.
The consolidated deficit factors the budget balances of SA’s national departments, social security funds, state-owned enterprises and the provinces.
Projections are that the shortfall will drop to 3.2% of GDP in 2017-18 and to 3% in 2018-19. This is based on the assumption that the economy will grow at 1.7% this year, 2.6% next year and 2.8% in 2018.
However, the International Monetary Fund estimates that SA’s economy will grow at less than 1% this year. But its 0.7% growth forecast is more optimistic than the Bank of America Merrill Lynch, which expects the economy to advance by 0.4%.
This heightens the risk of SA missing its deficit targets.
Low growth will also put further strain on tax revenues, which are already drawn from a small and dwindling pool.
Personal income tax and corporate income tax are taking a knock because companies are either shutting down, cutting jobs or streamlining their operations.
The government has, in turn, had to implement tough measures to curb the large deficit.
It announced a marginal rise in personal income taxes for the current financial year. The increase was marginal so as not to put the brakes on weak consumer spending growth.
The tax increase is expected to help the government raise an extra R12bn this fiscal year and R15bn in the next fiscal year.
The state has also introduced spending ceilings and gone on a belt-tightening exercise.
Economist John Ashbourne, of London-based economic research company Capital Economics Africa, says meeting budget deficit targets will require spending cuts or tax increases because the economy is performing badly.
Investors will also be eagerly anticipating Mr Gordhan’s budget speech for an indication of whether the government will institute more tax hikes or spending cuts.
"Mr Gordhan certainly has his work cut out. But this budget will be the first real test of whether he has the influence within the government to really have an impact," Mr Ashbourne said.
In recent weeks, Mr Gordhan has said all the right things to calm markets, including giving assurance that the state will continue on its path to fiscal consolidation.
BNP Paribas Securities economist Jeffrey Schultz predicts in a research note that value-added tax (VAT) could be upped in the budget, citing the deficit and the fact that personal income taxes have already been raised.
Standard & Poor’s sub-Saharan Africa MD Konrad Reuss said weak economic growth and policy missteps would lead to SA being downgraded. However, government commitment to strong fiscal consolidation, higher economic growth, clear policies and a friendlier labour and investment climate would help SA avoid being downgraded, he said.
This article first appeared on bdlive.co.za.