Budget relies on increased growth to balance the books
FINANCE Minister Malusi Gigaba delivered South Africa’s 2018 Budget in a more positive atmosphere given that Cyril Ramaphosa has been sworn in as president. However, was he able to address the glaring revenue shortfalls, ever-increasing debt to gross domestic product (GDP) and threat of Moody’s following in the steps of Fitch and S&P Global with a downgrade of South Africa’s local debt to junk status?
The economy has slowed significantly in recent years. During the last quarter of 2016 and the first quarter of 2017 it even retracted into negative territory.
Gross domestic product growth of 1% is now expected for 2017, up from 0.7% projected in October 2017. The National Treasury projects real GDP growth of 1.5% in 2018, 1.8% in 2019 and 2.1% in 2020.
The economy has benefited from strong growth in agriculture, higher commodity prices and, in recent months, improving investor sentiment and a stronger rand.
The global economy continues to provide a supportive environment for expanded trade and investment. World economic growth is at its highest level since 2014 and continues to gather pace. GDP growth is rising across all major economies. The global economic recovery provides a supportive environment for South Africa to expand trade and investment, but domestic constraints that have reduced business confidence hinder accelerated growth.
Gigaba announced a projected revenue shortfall of R48.2 billion in 2017/18, which is R2.6bn less than the October 2017 estimate. He therefore announced an increase in VAT from 14% to 15%. He will also maintain the top four personal income tax brackets with no inflationary adjustment to eliminate fiscal drag. These two measures will raise R36bn in 2018/19, enabling government to narrow the revenue gap.
In a significant step, the Budget recognises that a corporate tax rate of 28% is affecting South Africa’s global competitiveness. The main tax proposals for 2018/19 are: • A one percentage point increase in VAT to 15%. No adjustments to the top four income tax brackets, and below inflation adjustments to the bottom three brackets.
• An increase of 52c/litre for fuel, consisting of a 22c/litre increase in the general fuel levy and 30c/litre increase in the Road Accident Fund levy.
• Higher ad valorem excise duties for luxury goods.
• Increased estate duty, to be levied at 25% for estates above R30 million.
• Increases in the plastic bag levy, the motor vehicle emissions tax and the levy on incandescent light bulbs to promote eco-friendly choices.
The Budget is introduced as government has an opportunity to reinforce confidence and contribute to a recovery in growth and investment. A renewed sense of optimism is driven by the expectation that government will finalise many outstanding policy reforms, act decisively against corruption, and swiftly resolve governance and operational failures at state-owned companies. Investor sentiment has improved, leading to a strengthening rand exchange rate and lower government borrowing costs.
The rand strengthened significantly against the dollar during 2017 and the first part of 2018, reaching R11.64/$1 yesterday – a level last seen in 2014. The currency’s recent performance reflects investors’ reaction to domestic political developments, as well as overall strength in developing-country currencies which benefited from US dollar weakness, the search for higher yields by international investors and rising global commodity prices.
Recent events suggest an upturn in the business cycle. If Budget 2018 stands as a commitment by government to practice sustained fiscal discipline, this could steer South Africa’s economic fortunes in the right direction.