Conservatism is order of the day
BUDGET 2016: PRAVIN’S JUGGLING ACT TICKS BOXES
Whether or not Gordhan’s speech will appease ratings agencies remains to be seen, but he answered many hard questions.
Appeasing the ratings agencies was the immediate objective of the 2016 budget yesterday and with that in mind, fiscal conservatism was the order of the day.
The government has pulled off an extraordinary juggling act: it has taken steps to sharply reduce the budget deficit while it’s found the means to accommodate additional spending (some of this from the wage bill), without hiking taxes excessively.
Growth imperative
Radical structural reform to the economy, essential for long-term growth was less overt.
For instance, government has recognised that policy uncertainty constrains growth. Similarly regulatory bottlenecks are being addressed, as is the lack of trust between government and business. “Building business relationships sounds like a soft issue,” Finance Minister Pravin Gordhan said at the pre-budget press briefing. “But we have worked hard in this regard and in weeks to come we see will concrete areas of co-operation and co-investment.”
Changes can be expected at South African Airways (SAA) board level within weeks, followed by changes at the management level. A proposal to merge SAA and SA Express has been tabled and a minority equity partner for SAA may be sought.
Gordhan passed the fiscal credibility test – the economic growth assumption: anything too high or unrealistic would blow the credibility of the entire budget.
Treasury reduced the growth outlook to 0.9%, – a whisker away from recession and down from the 1.7% predicted at in the Medium Term Budget Policy Statement (MTBPS).
The 2016 Budget sets a course of more rapid fiscal consolidation than that outlined in October’s MTBPS, and stabilising the growth of public debt.
Treasury anticipates that in 2016/17 it will achieve a consolidated primary surplus for the first time since 2009.
The net borrowing requirement – needed to finance the budget deficit – will total R172.8 billion, marginally lower than projected in the 2015 budget.
Steps are being taken to rebuild the contingency reserve to accommodate the higher than expected wage bill.
It was expected Treasury would shy away from putting too much weight on revenue increases, fearful of hampering growth, says Peter Attard Montalto of global research firm Nomura. As such the main heavy lifting of this budget lay within expenditure.
About R31.8 billion has been reprioritised over three years. This includes R16.3 billion for higher education and R1.1bn for spending related to drought relief.
Another factor closely watched is the expenditure ceiling. This will naturally fall with a lower growth outlook. However, Treasury has reduced this further by R10 billion in 2017/18 and R15 billion in 2018/19¸ mainly from a reduced salary bill.
Tax was always going to be a core of this budget and the tax to GDP ratio increases from 26.3% to 27.8% in 2018/19. Tax proposals add R18 billion to revenue (R25bn in 2017/18 and R30 billion in 2018/19) and are meant to be “inclusive”. Significantly, VAT was not increased.