Gordhan steers a tight course
Prudence kept amid demands
FINANCE Minister Pravin Gordhan yesterday navigated a tight fiscal space – giving hope to some of the country’s demands but maintaining a prudent stance on spending.
Gordhan said while the country had to make some concessions on the demands, the government could not afford to spend more than it had.
Gordhan said during the presentation of his mediumterm budget policy statement (MTBPS) that spending would be reduced by R10 billion in 2017/18.
The Treasury announced tax measures to raise an additional R43bn over two years to reduce the budget deficit from 3.4 percent in the current year to 2.5 percent in 2018/19.
Gordhan also slashed the country’s growth forecast and predicted a wider budget deficit for the 2016/17 fiscal year, warning that it would have to cut spending to avoid credit rating downgrades.
The Treasury said the economy would grow by 0.5 percent in 2016, down from an estimate of 0.9 percent in February, and rise to 1.7 percent growth next year.
The consolidated budget deficit for 2016/17 was now projected at 3.4 percent of gross domestic product (GDP), marginally higher than the February estimate of 3.2 percent.
The Treasury said the MTBPS puts forward measures to narrow the budget deficit and stabilise debt.
Less revenue “Without taking these steps, we risk opening the the door to rapid capital outflows and further economic disruption, setting back transformation, and leading to unemployment and social distress.”
It said a combination of the declining GDP growth rate and lower tax buoyancy had reduced the in-year tax estimate by R23bn.
“The shortfall is offset by drawdowns of the contingency reserve, dedicated savings and projected underspending,” the Treasury said. “As a result, the shortfall declines to about R11.5bn, limiting its impact on the budget balance.”
The Treasury said without policy adjustments, gross tax revenue would fall short of February estimates by R36bn in 2017/18 and R52bn in 2018/19.
Economists described the MTBPS as nothing but a solid effort in difficult circumstances while others saw it as pragmatic.
Nomura economist Peter Attard Montalto said the statement stretched pragmatism and space allowed by the ratings agencies to the maximum and beyond.
“Overall, there is a hefty reliance on underspend, significant tax hikes and some consolidation measures, as well as utilising contingency reserves to tie the whole thing together,” he said. “A reduction in the expenditure ceiling was of token size but a positive signal.”
Old Mutual Investment Group economist Johann Els said it was uncertain if the medium-term budget was enough to avert downgrades.
“They are certainly trying hard, but we have seen no further improvement in other issues such as SOEs (stateowned enterprises), with no further announcements to strengthen governance, plus Treasury seems to have caved on the nuclear issues, stating it will work with the Department of Energy and Eskom, with Eskom to lead nuclear,” Els said. “This will raise debt guarantees for Eskom even further in future years.”
Other economists said clarity was still needed on how an additional R43bn would be raised through tax measures.
Mazars South Africa tax consultant Tertius Mazar said more clarity was required on how this would be achieved.
“A number of mechanisms for additional tax revenue have already been put forward, such as the new trust legislation and sugar tax, but it is not clear whether these measures will be sufficient.”
Nazmeera Moola, the joint head of fixed income at Investec Asset Management, said Gordhan delivered a pragmatic budget that was good for the country and enough to keep ratings agencies on hold.
“Rating agencies care about growth. The measured consolidation that the Treasury has outlined shows a firm commitment to meeting the fiscal objectives they committed to in February 2016 without killing growth,” Moola said.
The Treasury said several emerging factors, however, supported an economic recovery, citing the 20.9 percent depreciation of the real exchange rate since 2010 as an opportunity to increase exports.
Gordhan said the consolidation measures were likely to have some dampening effect on the economy but over the medium term, further loss of confidence and a ratings downgrade were greater risks to the economy. – Additional reporting by Sechaba ka’Nkosi