Investors, agencies wary ahead of Gigaba’s budget

Finance Minister Malusi Gigaba will have his big moment on Wednesday, when he presents his first medium-term budget to a market that is bracing for a sharp slide in SA’s fiscal fortunes and waiting to see whether the minister has a plan to arrest the decline.

Ratings agencies and investors will be watching the numbers closely to see whether and how the minister will stay on the path of fiscal prudence, as he has promised, in a context in which growth has disappointed and revenue collections for the current fiscal year are expected to undershoot February’s budget targets by R30bn-R60bn.

They will also be keeping a wary eye on the effect that bailouts to South African Airways and other ailing state-owned enterprises will have on the fiscal deficit.

Gigaba has already raided the National Revenue Fund for the cash to finance a R5.2bn rescue of SAA, going back on the government’s commitment to do so in a “deficit neutral” way.

Markets will be watching to see where he plans to find the total R10bn-R15bn of bail-out cash, given that a sale of the government’s Telkom stake now seems to be off the table.

Another big issue on the spending side of the budget will be public sector pay, which has gobbled up an ever-increasing share of government spending in recent years. Public sector trade unions have said they will be tabling demands for pay increases of 10%-12% going into 2018’s wage negotiations — increases that economists say are unaffordable.

It is unclear how negative a “bad budget” might be for market sentiment. Standard Bank economist Kim Silberman said that although the budget had shown fiscal slippage in each of the past four years, the market had not reacted because there was a very credible Treasury, which comforted investors.

“The risk here is perhaps it will not be seen as being as credible this time,” she said.

The shortfall in revenue collections could see the main budget deficit blow out to 4.3%, from February’s 3.5% projection and stay above 4% over the next three years, unless Gigaba cuts government spending or hikes taxes.

That would mean that the public debt ratio, which is already just more than 50% of GDP, will keep rising instead of stabilising over the medium term as the government promised ratings agencies and investors. Economists expect the minister will have no option but to pencil in additional tax hikes for 2018, over and above the extra R15bn of tax measures already budgeted for.

However, that will be a further drag on growth, following the increases of the past two years, which included a one percentage point across-theboard increase in personal income tax rates in 2016 and a hike in the top marginal rate, from 41%, to 45% in 2017. There was also little relief from the effects of “bracket creep”.

Citi economist Gina Schoeman said the increase in personal income tax had been “massive”, and 2017 was the first time the Treasury truly used personal income tax as a means to generate revenue and compliance rates were dropping.

“To fix the fiscal policy mess tax hikes, especially income taxes, are not sufficient. The minister will have to do more, especially on the expenditure side,” she said.

Taxpayers will have to wait until February’s budget for details of any new taxes or tax hikes: the medium-term budget is never a tax budget but simply updates the government’s growth and revenue projections and sets out the path of revenue, expenditure, the deficit and the debt over the next three years.