By: Tertia Jacobs, Investec Treasury Economist
Step in the right direction, but not out of the woods yet
Finance Minister Tito Mboweni’s Budget has been well received by investors and analysts but has angered trade unions. Continuing his precarious balancing act, Minister Mboweni announced some tough measures, while offering some relief to taxpayers.
South Africa’s fiscal position has gradually deteriorated during the past decade, and concerns have naturally been rising especially given the rapid increase in public sector debt levels over the past two years. South Africa’s government debt, as a percentage of GDP, has increased by 30.2% to more than 60% over the past 10 years. Worryingly though is that this acceleration is more rapid than the average increase (of 15%) in emerging market debt over the same period. Only countries such as Zambia, Ukraine, Croatia and Argentina have debt levels accelerated at a faster pace. So, what’s in store in the financial future?
- Containing the public sector wage bill much needed
The past five years have seen a persistent increase in personal income taxes, including a one percentage point increase in the VAT rate, to maintain a path of fiscal consolidation. Expenditure, however, continued to increase owing to the large public sector wage bill and financial assistance to struggling State Owned Enterprises (SOEs). The high tax burden on individuals, combined with low consumer confidence, an increase in unemployment and emigration, has seen a change in fiscal strategy from hiking taxes to contain the wage bill to prevent the budget deficit from rising.
While the Budget incorporated a moderation of the increase in the public sector wage bill, negotiations are still in order.
- More bailouts for SOEs but its not a strategy
Continued hefty financial assistance to SOEs is not sustainable and has been a key reason for the elevation in SA’s government borrowing trajectory. Says Tertia Jacobs, Investec Treasury Economist: “Over the past 12 years, government has allocated R162bn to SOEs, of which Eskom accounted for 62%. The seven largest SOEs’ total debt amounts to R759.9bn, of which 62% is guaranteed by government. Debt repayments over the next three years are estimated to be R178.1bn, of which R103.5bn is held by Eskom, while South African Airways (SAA) is to receive R16.4bn from government to repay guaranteed debt of R17.3bn and cover interest payments. Government guarantees on SOE debt are a further negative for SA’s credit ratings assessment and while it anticipates additional funding will be required to cover restructuring costs, it is clear that this kind of support cannot continue indefinitely.”
- A sigh of relief – no tax hikes
The government is between a rock and a hard place. Top rate taxpayers are already close to the edge and there were concerns that they would be pushed over by further increases. While a VAT increase would have been both politically and economically unpalatable there was much speculation if we would witness another increase.
South African breathed a sigh of release around the decision to refrain from raising taxes – one ascribed to the weak economy, which would render more tax increases ineffective. Consideration has been given to the fact that the shortfall in revenues have exceeded the amount by which taxes have increased. The slower growth rate in private sector wages and a stagnation in consumption and business profitability have resulted in significant downward revisions in personal income tax, corporate income tax and VAT receipts over the past five years.
Hiking taxes, instead of cutting expenditure would negatively impact consumers and corporates facing these consumers (retailers), risking higher unemployment. The net effect would have been a further dwindling in real disposable (after tax) income growth, which has been a key driver for the slowdown in economic growth in South Africa. Higher indirect taxes, such as Eskom’s proposed 16% tariff increase would also erode households’ expenditure growth.
The modest tax proposals of the Budget are therefore positive and include personal income tax relief through inflation adjustments in all brackets, along with inflation-adjusted increases in the fuel and Road Accident Fund (RAF) levies. The revitalisation of SARS is expected to contribute to increased tax revenue over the medium term. Minister Mboweni also announced that he anticipates a decrease in corporate taxes in the near future. South Africa’s corporate income tax rate has remained unchanged at 28% for over a decade – way above that of the United States and the United Kingdom, and emerging markets such as India.
“The Budget does not offer enough to see SA’s credit rating outlook return to stable, but we believe Moody’s downgrade as early as March 2020 can be avoided. The rand strengthened and markets favoured the outcome of the Budget somewhat, and while the focus remains on government’s ability to implement reforms and “crowd in” the private sector, we are definitely making strides in the right direction, but definitely not out of the woods yet,” concludes Jacobs.
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