Expect Gigaba to increase taxes
NO OPTION: HOLE OF BETWEEN R40BN AND R60BN
SA’s R40-R60 billion budget deficit means government spend must go down or taxes up.
He must raise more funding, but cannot simultaneously increase expenditure. Moneyweb
s he prepares to deliver his first Medium-Term Budget Policy Statement (MTBPS) today, Finance Minister Malusi Gigaba faces a budget hole of between R40 billion and R60 billion.
To put that in context, if government increased VAT by 1%, it would only bring in an extra R20 billion.
The choice that isn’t a choice
Practically, there are only two ways to manage this budget deficit – either the government cuts expenditure, or it raises additional revenues.
“If you look at trends in the expenditure data and the yearto-date numbers it seems that there is going to be some underspend, so the minister has a bit of leeway,” Sanlam Investment Management’s Arthur Kamp says. “He may also announce further cuts to the baseline over the medium-term expenditure framework.
“I do, however, suspect that that would impact capital expenditure negatively, which is not ideal.”
Politically, it’s difficult for Gigaba to announce cuts in major government expenditure items e.g. the government wage bill or social services. Either way, there’s little he can do to cut back on spending for the current year.
Taxes are coming
Essentially that means Gigaba must find more money. He could do this by selling government assets, but that looks unlikely.
“The option I would prefer is to sell something,” says Efficient Group’s Dawie Roodt. “But they are probably not going to do that because it will take some time. It’s too late already for this year. Also, the people in charge of the ANC and their alliance partners are still not in favour of selling things.
“As such, it seems inevitable that taxes will be raised.
“Gigaba will have to be very specific, because the tax options are all very exhausted now. To introduce certainty he would have to show where he is going to get what he needs…. there will be disappointment if he doesn’t,” says Alexander Forbes Investments’ Lesiba Mothata.
The list
Mothata says there’s a list of potential, likely tax changes, including removing the VAT exemption on fuel (could raise R30 billion – R40 billion); doing away with the VAT exemption on electronic services and online transactions (R8 billion); and scrapping medical aid credits (R10 billion).
While these together could potentially make up the shortfall, they’re contentious.
Novare’s Tumisho Grater suspects Gigaba has two other likely options.
“He could look at not adjusting tax brackets for inflation. Another thing would be to possibly look at raising existing wealth taxes.”
What he can’t afford to do
Given the situation in which SA finds itself, Gigaba clearly has tough choices to make. He must raise more funding, but one thing he cannot afford to do is simultaneously increase expenditure.
“If he were to do that, that would be very negative for markets. It would say that we are abandoning fiscal consolidation,” RMB’s Isaah Mhlanga says.
That doesn’t mean that there won’t be pressure from some quarters for him to do that.