Finance minister Nhlanhla Nene’s medium-term budget policy statement held no surprises. The main question now is whether it will have been enough to convince rating agencies not to downgrade. Fitch already has a negative outlook on SA’s sovereign credit rating.
The sharp downward revisions to economic growth outlooks, not only by treasury but by other institutions as well, will not sit well with the rating agencies, whose ratings matter for SA’s borrowing costs.
Despite Nene lowering the economic growth outlook for Africa’s second-biggest economy for this year to 1,5% from 2% in February, to 1,7% from 2,4% for next year, and to 2,6% from 3% for 2017, some economists still think revenue targets will be met.
Robust personal income tax and value added tax revenue in the year to date, and delayed cuts in unemployment contributions, should help government meet its near-term revenue targets, says BNP Paribas Cadiz Securities SA economist Jeff Schultz. The tax revenue target for the 2015/2016 financial year is R1,1 trillion.
The numbers that are likely to suffer from lower economic growth are the budget deficit targets for the next three years.
If Nene cannot find areas to reduce expenditure, there is still the chance that he may raise taxes again, but not personal income and corporate taxes. This is because personal income tax rates have already been raised, though marginally, in the current fiscal year and companies are under pressure from economic circumstances.
Value added tax is increasingly looking like the one that will be raised in the February budget next year.
The public sector wage bill will force government to redirect money meant for other things, such as employing more people. Expectations for debt to stabilise at high rates of almost 50% of gross domestic product (GDP) will also weigh on the fiscus.
SA faces both home-grown and global economic upheavals.
Economic growth in the first few months of the year was crippled by power-supply disruptions, which have since been reduced as a result of lower demand and the addition of more power to the grid from a completed unit at the Medupi power station.
In the second half, the effects on the economy of lower commodity prices and a slowdown in Chinese growth and demand are becoming more pronounced.
These factors and the slow pace of recovery in advanced economies — where most SA-manufactured goods are destined to go — will hamper SA’s own economic recovery.
The Reserve Bank has lowered its growth forecasts at three of the five meetings it has held this year as the economic environment has deteriorated. It is not good news for poverty alleviation and job creation.
SA’s GDP even contracted in the second quarter and the formal sector shed 1 000 jobs.
That felt like a small number, considering the 1,3% decline in GDP in the second quarter. It is possible that more jobs could have been lost, which the statistics agency may have not been able to record.
The International Monetary Fund (IMF) has to be the least optimistic of all the institutions that forecast SA’s economic growth prospects.
At the start of the year, the global lender expected to see SA’s economy expanding by 2,1% this year and 2,5% next year. These figures were revised lower throughout the year and by October were at 1,4% and 1,3% respectively.
❛❛ The Reserve Bank has lowered its growth forecasts at three of its five meetings this year