At last! Some positivity!

Despite concerns about the future of the Minister of Finance, Pravin Gordhan, his annual budget speech for 2017 was remarkably upbeat. GAVIN MYERS reports

Gordhan was never going to have it easy in the lead-up to the 2017 budget, but it appears as though he managed what is essentially a juggling act. As Azar Jamine, CEO and chief economist at Econometrix, points out: “On the one hand, the political pressures for ‘radical economic transformation’ and the notion of state capture have threatened the treasury. And, on the other hand, there are the ratings agencies to consider.”

“However, the most positive aspect of this budget is that it was the first time in several years that Treasury was not obliged to reduce its economic growth forecast or revenue collections. There are also encouraging factors boosting economic growth,” he adds.

“Government has been able to sustain fiscal discipline and stick to its programme of reducing budget deficits over time, and, in that way, cap the rising trend of public debt; which should be well received by the ratings agencies,” Jamine comments.

Of course, by now, it is known that the increased tax burden to provide additional revenue of R28 billion will fall to the wealthy; with the introduction of a new super tax bracket of 45 percent. Furthermore, the fuel levy will bring in R3,2 billion more than what would’ve been received from inflation alone. In real terms, if inflation rises to just over six percent, then overall tax revenue is set to rise by 10,5 percent.

Jamine says he was encouraged by the fact that Gordhan allocated two thirds of the budget to social development “and not fancy projects”, as well as by the fact that there has been some improvement in the management of state-owned enterprises (SOEs).

“There wasn’t anything in the budget to make one think that structural reforms are coming to lift the economic growth point way beyond two percent per annum, but there was continuous emphasis on some of the economy’s structural weaknesses that do need to be overcome, such as: education, the need to improve the competitive nature of South Africa’s economy and encourage small business activity (to which R3,9 billion was allocated). South Africa’s labour-relation tensions also need to be defused, however, and we need to improve the relationship between the private and public sectors,” Jamine notes.

According to Jamine, there are still certain things that have to happen to ensure a much rosier picture. “A key requirement is to tame public debt (currently at
R2,2 trillion), and it is vital to improve the running of SOEs – R475 billion in guarantees by government to SOEs is outstanding. If parastatals were to go belly up, public debt would rise by a further 20 percent.

“There is a positive development, however. Return on equity of SOEs turned positive in 2016, and the ratio of liabilities to assets of SOEs is decreasing.

“In the long term we will need to lift our growth rate significantly; the budget deficit, at 3,1 percent, is still higher than the expected 1,5 percent economic growth rate in the year ahead.”

Encouragingly, says Jamine, government has succeeded in sustaining the downward trend in its budget deficit ratio to gross domestic product. “For first time in six years, tax revenue will overtake non-interest expenditure – we’re no longer chasing after our own tails,” he smiles. Furthermore, the highest allocation in expenditure is set to debt servicing costs, which will rise by 10,5 percent per year.

Regarding the rand, Jamine says it is still a fairly competitive currency, which creates a wonderful environment for exporters.

“Don’t get totally hung up on this budget alone, the other important driver that should not be underestimated is the global economy. There is an incredible correlation between that and South Africa’s economic growth rate; both are projected to improve over the next few years.

“We must be grateful that we (currently) have a treasury that is holding the fort, and we should be confident that the economy is not going down the tubes. In the short term, there will be at least some marginal improvement,” he concludes.

*This article was based on a presentation by Jamine at the 2017 Budget Review Breakfast, hosted by Econometrix and Grant Thornton.

What does industry say?

The Automobile Association (AA) has commented on an additional 30 cents per litre to be added to the general fuel levy, and an additional nine cents per litre to be added to the Road Accident Fund (RAF) levy, saying that this “is cause for great concern”. The levies come into effect on April 1.

“For every litre of petrol, motorists will pay paying R4,78, or 35 percent, on indirect taxes. South Africans, who are already buckling because of the weak economy, will now have to dig even deeper into their pockets, at a time when many are questioning government spending,” the AA says.

“Motorists remain easy targets for revenue collection. These levy increases are particularly prejudicial to motorists, especially in the context of a lack of proper, reliable public transport.

“These increases will not only impact on transport costs – including bus and taxi fares – but are also putting inflationary pressure on other commodities that rely on road transport to be delivered across the country,” the AA notes.

“We have long called for a portion of the fuel levy to be ring-fenced and used for projects such as Gauteng’s tolled roads. Instead, motorists must pay extra taxes for the use of the roads. The Association believes the time is right for a review of the fuel and RAF levies.”

Meanwhile, the National Association of Automotive Component and Allied Manufacturers (Naacam) has commended Minister Gordhan on the delivery of the 2017 budget, under what is still a very challenging economic environment.

“There is a concern that the higher tax implications for consumers may negatively impact demand for higher-end consumer products (such as motor vehicles) at a time when the domestic vehicle sales sector is not strong. This could impact on component manufacturers that supply vehicles built for the South African domestic market,” Naacam says.

“However, on a macro level it is reassuring to note a continued focus on industrial growth. The
R9,6-billion medium-term allocation for manufacturing incentives, coupled with the R4,2-billion industrial park and special economic zone spending continues a trend of spending on productive investment.

“Similarly, the R95-million allocation to a Steel Development Fund, intended to improve the competitiveness of foundries and steel fabricators, is cognisant of the support needed in one of the manufacturing sub-sectors, which has experienced significant decline in the recent past,” Naacam notes.