Finance minister Pravin Gordhan walked a tight rope between balancing government’s books, announcing measures to kickstart economic growth and appeasing ratings agencies during his 2017 budget speech. Although prudent in a low growth environment, it seems analysts aren’t quite buying his balancing act.
“We are at a junction where trying to juggle all these different interests is not going to work. We need to be bold. But the minister is caught between a rock and a hard place from a political perspective,” said Lullu Krugel, chief economist at KPMG.
She said the budget was marked by “too much tax and too little growth”.
The minister announced a R30 billion shortfall in revenue collection and announced plans to raise an additional R28 billion during the new tax year. These measures include increases in sin taxes, the dividend withholding tax rate, fuel levy and road accident fund levy, and a new personal income tax rate of 45% for those with taxable incomes in excess of R1.5 million.
Absa’s Chris Gilmour, said the so-called super tax could further hamstring growth as around 60% of the country’s GDP is driven by consumer spending. According to him, the wealthy, faced with less disposable income as a result of the tax increase, may be forced to reign in their spending.
At the same time Sanisha Packirisamy, an economist at Momentum Investments, praised the redistributive nature of the budget.
“They basically hit the higher income earners higher in terms of the tax reforms that have come through but they’ve also managed to shelter the lower income earners. They’ve done this by allowing for social grant increases in real terms of around 2.3% per annum, they’ve also set aside R2.5 billion to compensate for bracket creep and they’ve also lowered the transfer duty threshold,” she said.
Krugel also questioned the sustainability of personal income taxes as an on-going revenue driver. “Our personal income tax rate of 38% is much higher than the OECD and the reliance on this indicates that there is something wrong with the economy. Our economy is not growing.”
Following estimated GDP growth of 0.5% last year, Treasury expects economic growth to remain below potential, averaging 1.3% in 2017 and 2% in 2018. The South African Reserve Bank (Sarb) forecast growth of 1.1% and 1.6% over the same periods.
Analysts across the board felt that the budget lacked clarity on structural reforms intended to boost growth. While the minister mentioned the national minimum wage agreement, analysts hoped that he would address labour market reforms, including decisions around secret ballots and announce concrete measures to address the state-owned-enterprises (SOEs) that are a drag on fiscal resources.
“The problem is that there is always talk of reforms to governance and measures to improve financial stability but it doesn’t seem to be gaining much traction. Government guarantees are still quite significant,” added Trudi Makhaya, a consulting economist at Mercantile Bank.
She said that SOEs, if properly managed, stand to play a very transformative role in extending services across the country and opening up the economy. Like with President Jacob Zuma’s State of the Nation Address, the budget did mention policies that may boost growth but implementing some of these policies falls outside the scope of the National Treasury, Makhaya said.
Analysts were, however, pleased with Gordhan’s prudent approach to government’s finances.
The country remains on the path to fiscal consolidation, with the budget deficit expected to narrow to 3.1% of GDP from an estimated 3.4% in the 2016/2017 fiscal year. The debt-to-GDP ratio is expected to stabilise at 48% from 50.7% currently.
Experts said the 2017 budget is to have provided just enough comfort to tide the ratings agencies over until the mid-year review. South Africa avoided a sovereign rating downgrade by S&P, Fitch and Moody’s in last December but the agencies, which are to review the country’s investment grade status in June, have warned that weak growth and a poor fiscal performance could threaten the rating.
“If the deficit and debt figures outlined in today’s budget are attained (or even nearly attained), it’s not obvious that they would merit a downgrade to South Africa’s credit rating, which is currently just one notch above junk. The main risk, instead, is that finance minister Gordhan – one of the most investor-friendly members of the cabinet – could be replaced,” said William Jackson, a senior emerging markets economist at Capital Economics.
Should Gordhan be replaced, his budget may be rendered meaningless.
“There will be a sea change in policy if Gordhan were to be replaced by a candidate more tolerant of rent extraction. For one, Gordhan’s commitment to service and efficient and effective government and governance, underpinned by the constitution, would be lost. The very requirement of fiscal consolidation will go out of the window. And no current fiscal targets will be able to be relied upon. Allocations would be determined by very narrow financial interests,” said Gideon Pimstone, a senior investment strategist and macro analyst at Consilium Group.
He said indications that Gordhan’s role has already been usurped include his backtracking on the promise to halt guarantees to SOEs that don’t have sustainable business plans, his inability to populate the boards of SOEs and the South African Revenue Service (Sars) with his preferred candidates as well as his failure to control government spending particularly in national departments and at SOEs.
“Spending on the ever-growing civil servant cohort, now accounts for over 35% of the budget. Most of the savings gains have been at a provincial and local level,” Pimstone said.
Speculation that Gordhan may be axed as finance minister in favour of Brian Molefe is rife. The ANC has announced that Molefe, who resigned as Eskom CEO last November after being implicated in former public protector Thuli Madonsela’s State of Capture report, will be sworn in as a Member of Parliament. It is said that Molefe may fill a recently announced vacancy in Parliament’s Standing Committee on Finance.