SA’s fiscal deficit widens ‘with R50bn shortfall’

ECONOMIC WEEK AHEAD

THE Budget will dominate the headlines next week, while inflation data will be the most important data releases. January consumer inflation is scheduled for Wednesday and January producer inflation for Thursday.

Apart from the inflation data, we have the January steel production data, the December tourism accommodation and tourism data, the December food and beverage data, the December land transport data and the December leading indicator.

President Jacob Zuma’s legacy of free tertiary education, announced just before the December ANC conference, will be the biggest headache for whichever finance minister will present the Budget.

Treasury had done their sums and said the country could not afford free tertiary education for all, which is why the promise has since been modified.

But it still means an unexpected expense compared with the three- year budget plans outlined in the MediumTerm Budget Policy Statement (MBTPS) in October.

In the MTBPS, the fiscal deficit for the present fiscal year, which ends next month, was projected to widen to 4.3% of gross domestic product (GDP) from 3.1% projected in the February 2017 Budget.

This was largely due to a R50.8 billion shortfall in revenue compared with the February 2017 projections

Although revenue in the past few months has started to pick up with revenue growth of 10% year-on-year in December 2017, the government needs to find funds for “free for some” tertiary education and other unanticipated costs such as mobile desalination plants and other drought mitigation expenses.

That is why many economists expect an increase in the VAT rate, but increases in personal and corporation taxes, as well as the fuel levy are also likely to occur to spread the tax burden.

After the pain of tax increases, consumers should be cheered by the January consumer inflation data, as the stronger rand as a result of Cyril Ramaphosa’s election victory is likely to see consumer inflation ease from December’s 4.7% y/y rise.

For similar reasons, the January producer inflation rate is likely to come in lower than December’s 5.2% y/ y increase.

December steel production surged by 20.9% y/y after a 10.1% y/y rise in November so a pullback to a smaller y/y increase is expected in January.

Income from tourism accommodation grew by 1% y/y in November so tourism industry operators will be hoping there will be better news in the December data.

The tonnage transported by land grew by only 6.5% y/y in November as rail tonnage fell by 2.3%, while road tonnage increased by 9.7%.

A return to near-double digit increase for total tonnage should be expected in December.

Nominal income in the food and beverage industry rose by 9% y/y in November after a small 3.5% y/y increase in October and when one observed queues at takeaway outlets during the festive season, then a similar order of magnitude increase should be foreseen for the December data.

The leading indicator was unchanged on a monthly basis in November and is back at its February 2013 level.

The leading indicator is supposed to forecast economic activity six months ahead and a monthly increase should be expected in December given how financial markets reacted to Ramaphosa’s election victory. Six of the 10 component time series that were available for November increased, while four decreased.

The largest positive contributions in November resulted from an increase in the average number of hours worked in the manufacturing sector followed by an acceleration in the 12-month percentage change in the number of new passenger vehicles sold.