Keeping the numbers up

It’s an election year, so things may change, but here are some of the salient points of Minister of Finance Pravin Gordhan’s 2014 budget speech.

A midst a continually weakening rand, slow growth in South Africa’s gross domestic product (GDP), a disheartening trade imbalance and many service delivery and worker strikes, Gordhan’s 2014 budget speech was expected to be an “electioneering” one. In the opinion of Econometrix director and chief economist Azar Jammine, however, it was anything but.

With the sponsorship of Business Report and financial services company NOAH, Jammine gave his rundown of the budget, a day after Gordhan’s speech.

According to Jamime, Gordhan faced huge constraints in drawing up a budget at a time when economic growth has been sub-optimal, but commended him on doing a sterling job in keeping the show on the road. “In many ways the budget gives us an opportunity to laud the fact that our national treasury and revenue services are two institutions in our landscape that are making a huge contribution to keeping our economy going,” Jammine says.

So what can be expected over the next year or so? Jammine says that Econometrix’s view is that a 2,7 percent growth forecast for 2014 is achievable in the short term. This is taking into account that economic growth was considerably softer than anticipated last year (1,9 percent versus the 2,7 percent anticipated) and inflation forecasts have been revised sharply upwards because of the continuing depreciation of the rand. We are now looking at 6,2 percent average depreciation inflation for this year, compared to 5,5 percent for last year.

Jammine is quick to point out, though, that our own GDP correlates closely with global trends; and that global economic activity will pick up, as will our own, due to improvements in exports. Nevertheless, we are importing a lot more than we are exporting – a “structural weakness” in our economy, as Jammine puts it. “Over the last 10 years, retail sales have risen by 70 percent, but manufacturing production by only 15 percent. Therefore, we need to import, and this creates a current account deficit,” he says.

What about the rand, then? Jammine says that over the last 33 months, the rand depreciated steadily, meaning inflation has risen slowly. He expects it to rise to the upper end of six percent, but not to go “totally bezerk” and eventually come down to an acceptable level. The rand itself shouldn’t worsen to more than R10,80 to the dollar this year and about R11,60 next year. “This is not necessarily a bad thing,” says Jammine, “it has allowed us to reap the benefits in foreign tourism, climbing at 10 percent per annum over the last four years, which has also supported the accommodation and retail sectors,” he continues, again emphasising the need to kick-up our exports.

Having fallen gradually over the last five years, actual economic growth is expected to muddle along between two and three percent for the next few years.

Government spend on infrastructure and development will amount to R847 billion over the next three years, with transport and logistics being allocated R347 billion (R425,7 billion has been spent over the last four years), energy R118 billion, and R112 billion on water and sanitation, for example. “An interesting nuance that’s taken place, though, is that the figures have shown a fairly big change in favour of more being spent on transport and logistics, relative to energy,” says Jammine.

Perhaps unsurprisingly, rail features strongly within this. As reported by Business Report, government will increase spending on rail infrastructure by 20 percent a year. Transnet has upped capacity on its coal lines and plans are in place to extend its coal, iron ore and manganese lines. The Passenger Rail Association of South Africa (Prasa) also refurbished 500 Metrorail coaches in 2013, and its new procurement plan is under way with R22,8 billion allocated to upgrading commuter rail services over the next three years.

Furthermore, total transport expenditure is up 11,9 percent to R81,6 billion and national spending on public transport oversight will increase by R1,438 billion over three years. It has also been quoted that, over the next two years, Johannesburg’s Rea Vaya Bus Rapid Transit system aims to double the average number of weekday passengers and Cape Town’s MyCiti system is to increase weekday usage by a third. Spending on roads will increase by seven percent a year in the medium term. R143,8 billion is to be allocated to municipal infrastructure over three years as well.

What of taxes, then? In line with the National Development Plan (NDP – government’s plan to address our structural impediments and lift our economic growth rate) businesses will receive incentives to employ people who have never worked before, by paying only half their tax in their first year. The Davis Tax Committee has also been set up to restructure the tax system and reduce the compliance burden of small businesses. Company tax revenue has grown a lot faster than originally anticipated and, to some extent, the same applies to personal tax revenue.

“That has, to some extent, compensated for the shortfall of VAT, fuel levies and excise duties,” notes Jammine. These are likely to remain relatively low, with the fuel levy limited to an inflation-related 12c a litre (as of April 2) and the Road Accident Fund cut to increase by 8c a litre.

Interestingly, company car allowances also fall into the picture, says Business Report. Employees of vehicle original equipment manufacturers will be paying more tax, as their fringe benefits will now be based on the market value of the vehicle and not the cost of the vehicle to the employer. This will, however, be incremental over four years. Taxation on maintaining and refuelling company cars will also be done in a more equitable manner.

A personal tax relief of R9 billion has been allocated, meaning it will now account for 33,6 percent of all tax. “This will help somewhat towards compensating for the erosion of disposable income by e-tolls and higher petrol prices and all those things!” jokes Jammine.

“I do not believe Gordhan had a lot of room,” says Jammine in closing. “What is really needed long term is to try to address the structural weaknesses of the economy: education, the labour market, small business activity, infrastructure and so on.”

There is also speculation that there will be another budget when the new government comes into office in June. It’ll sure be an interesting year.