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All eyes on Gordhan’s crucial budget speech

Monday, 22 February 2016   (0 Comments)
Posted by: Author: Ntsakisi Maswanganyi
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Author: Ntsakisi Maswanganyi (BDlive)

Finance Minister Pravin Gordhan will take to the podium in Parliament on Wednesday carrying a huge weight of expectations when he delivers one of his most important budget speeches to date.

Moody’s, Standard & Poor’s and Fitch will have their notebooks out when SA Inc presents the state of its financial affairs.

Tax hikes that are not too onerous on the economy and slashing state spending will not only boost the rand’s recent gains, but could also keep a ratings downgrade to junk status at bay.

Opinion is divided on which taxes could be increased, but some analysts have pointed to value-added tax (VAT), personal income taxes, fuel levies, sin taxes, capital gains taxes, dividend taxes, excise taxes and estate duties as possible options.

Old Mutual Investment Group chief economist Rian le Roux says a percentage point rise in the VAT rate to 15% would give the state an additional R20bn.

Based on South African Revenue Service data, MMI Investments economists estimate that hiking the marginal personal income tax rate from 41% to 43% for those earning in excess of R1m a year could yield up to R4bn more annually for the state.

The government can slash costs by curtailing goods and services spending, but it could save billions by trimming its wage bill. Business and the rating agencies are concerned that the bulk of government expenditure is going to wages to the detriment of infrastructure investment.

MMI Investments economist Sanisha Packirisamy says: "Moreover, a higher inflation environment places further upward pressure on the state wage bill, posing a threat to fiscal consolidation. As such, curtailing new appointments and withdrawing funded vacancies are necessary given the binding inflation-linked, multi-year wage agreement put in place in 2015."

Last year, the state reached a 7% wage settlement with public servants. In effect, public servants’ salaries will increase at the rate of inflation plus 1% this year, as well as next year.

Barclays Africa economists Miyelani Maluleke and Peter Worthington suggest provinces ought to reduce their staff numbers to mitigate the effects of the deal.

"We think in the face of likely union opposition to actual retrenchments, most provinces will opt to rely on attrition and retirement to shrink the public sector payroll," Mr Maluleke and Mr Worthington say.

Paltry gross domestic product (GDP) growth has put pressure on tax revenues and could see Mr Gordhan revising budget deficit forecasts upwards. In October, the Treasury estimated the deficit would come in at 3.8% of GDP in the 2015-16 financial year, narrow to 3.3% in 2016-17, 3.2% in 2017-18 and 3% in 2018-19.

It is looking increasingly likely that Mr Gordhan might revise down the Treasury’s economic growth outlook to below 1% for this year and to less than 2% for next year.

SA Inc’s controversial new nuclear build programme and its financing, how the government will arrest the mismanagement of its state-owned enterprises, and how the delayed National Health Insurance will be funded are also set to feature in the finance minister’s speech on Wednesday.

In addition to the budget, unemployment and producer inflation data are due for release from Statistics SA on Thursday.

The unemployment rate in the fourth quarter could have come down slightly from 25.5% in the third quarter as the economy could have added temporary jobs over the busy festive season.

Producer inflation will have continued edging up in January compared with a year ago after rising 4.8% year on year in December, mainly due to the spiking of food and input costs.

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