“The proof will be in the pudding”
Much was expected of this year’s budget speech, but did Finance Minister Pravin Gordhan deliver? AIMEE SHAW reports
“The budget speech was eagerly awaited by everyone,” said Azar Jammine, director and chief economist for Econometrix, at this year’s post-budget conference, sponsored by Grant Thornton. The event was held in Sandton, on February 25, the day after the budget speech was delivered.
Jammine said: “There was excessive expectation for the virtual impossibility of trying to reverse South Africa’s declining economic fortunes in one fell swoop.”
Apart from the shortfalls of the weak economy, including the fall in commodity prices, drought, poor education and rising unemployment, the event that took place on the December 9, when President Zuma fired Nhlanhla Nene as finance minister, saw the rand take a cumbersome turn. “The rand is now used as a proxy by other emerging markets, because of the liquidity of the financial market,” Jammine explained.
According to Jammine, we have the 28th largest economy in the world, with trade in the rand amounting to US$ 25 billion dollars per day. What are the factors that have depressed economic growth in South Africa?
“The International Monetary Fund predicts a low growth point of approximately 0,7 to 0,9 percent this year, with a gradual recovery of approximately 2,5 percent in line with a similar pattern for the global economy,” said Jammine.
He added that there is great apprehension around government debt that is expected to rise from current levels, of just under 40 percent, to close to 50 percent gross debt to gross domestic product.
When meeting with the minister of finance, to discuss thoughts prior to the February 24 budget, Jammine stressed the importance of preventing a downgrade in credit rating from investment grade to junk status.
He noted that fiscal consolidation, together with the fixing of state-owned enterprises, is needed to prevent a further downgrade in our credit rating.
Jammine stressed that Gordhan would also need to avoid the liability of making promises of additional amounts of money over and above the balance sheet.
Government fears it will have to spend an additional 11,4 percent every year on servicing government debt, due to this budget deficit. Jammine explained: “If your economy is going to grow by only 0,9 percent, it certainly means that you are going to borrow more money than you will receive.”
He noted that, in order to increase potential economic growth and revenue, the government will need to implement fiscal discipline, and improve management of state-owned enterprises with structural reforms.
Jammine added that, besides the obvious negativity, our budget has substantially reduced deficits with plans for an accumulative reduction in borrowing over the next three years.
The tax increases announced were not as severe as many people had anticipated. Jammine felt that this is largely due to the magnitude of other crucial cutbacks that include employee compensation to public servants and the procurement and licensing processes.
He noted that with an increase of 30 cents a litre, which will be introduced from October 1, 2016, the fuel levy will earn an extra R6.8 billion along with the tyre levy.
The tyre levy is aimed at reducing waste and promoting the recycling of tyres. The Department of Environmental Affairs will have access to an allocated budget from the National Revenue Fund for recycling of waste tyres and other forms of waste.
Furthermore, higher inflation will mean increases in personal tax rates from 36,6 to 37,5 percent for the year ahead. “For most people, the effective increase in personal tax will be about
0,6 percent – which is significant, but it’s not crippling,” Jammine said.
So, why do we still have scepticism circulating the budget? Will our credit ratings experience a downgrade or not?
In closing, Jammine said: “The budget is not as negative as we had feared, but, for now, we will have to live with the scepticism, or at least until credit ratings are revised in December.
“Hopes are also high that, once the drought is over, we will start seeing our two to 2,5 percent growth rates returning, but, logically, it depends on whether our government can stick to its promises or not.
“Nice words, Mr Gordhan, but the proof will be in the pudding.”
They said it!
A number of “quotable quotes” emerged in the spate of the budget speech. Some are specific to the budget, others relate to the country in general. Here are some of CHARLEEN CLARKE’s favourites:
“South Africa has scored a number of ‘own goals’ when it comes to the economy”
– Azar Jammine, director and chief economist at Econometrix
“If you were thinking about setting up a trust, forget it”
– Eugene du Plessis, partner and head of tax at Grant Thornton Johannesburg
“We have a Mickey Mouse currency”
“I don’t think Zuma will go any time in the next two years”
– Justice Malala, award-winning journalist, television host, political commentator and newspaper columnist
“It is disappointing that Minister Gordhan projects that South Africa’s economy will only grow by 0,9 percent this year. This very low economic growth rate, below the population growth rate, is devastating, as it will result in falling gross domestic product per capita in South Africa in the year ahead”
– Kenneth Creamer, economist at the School of Economic and Business Sciences, Wits University
“One of the weaknesses of the budget was a lack in drought relief”
“Pravin Gordhan’s speech was motivating in many respects, but devoid of tackling the scourge of corruption, which impacts negatively in many areas, and undermines the development of the country. Opposition to Urban Tolling (Outa) is fully aware of government’s predicament and how it desperately it needs to increase the revenue base. However, we believe that Government’s relative reluctance and inability to seriously address the high levels of squandering, wasteful expenditure and corrupt abuse of taxes generated, has left Treasury and our country in our current lethargic state”
– Wayne Duvenage – Outa
“Race is going to be a feature of this country for the next two to three years. Brace yourselves for a year of serious turbulence at universities”
“I don’t see any growth stimulus in this budget. The focus should have been on growth of the economy and not taxing more things”
– Du Plessis
“If Pravin is fired … well, what we saw in December would be a picnic”
“The only thing that can save the rand is a change in the leadership of this country”
“This budget needed to be a real game changer. It wasn’t really”
“We’ve seen it all before. Can government deliver on its promises? How can we believe you? If government breaks its promises we will get a credit rating downgrade”
“The ANC will lose at least one metro in the local elections”
“The fact that the government is giving priority to the state of our economy and taking concrete steps to restore faith in the future of the country will be welcomed by our parent company, especially in light of the R4,5 billion investment programme that we have embarked upon”
– Thomas Schaefer, chairman and managing director Volkswagen Group South Africa
“One million people pay 64 percent of the tax in this country”
“A coalition between the DA and the EFF is likely at a municipal level. Maybe the DA could even offer Julius Malema the position as major of Johannesburg”
“The probability of a VAT increase next year is far greater once the local elections are out of the way”
“This country’s growth is partly due to adverse international conditions, but it is imperative that South Africans work together to remove domestic impediments to growth. Own goals, such as poorly performing state companies, service delivery failures, timidity in investment plans and anti-competitive conduct by companies, need to be eradicated in order to lift economic growth to the level needed to improve the lives of the majority of our people”
“Government should not say it needs to do things. At some stage it needs to start doing them”
– Du Plessis
“We have the third largest cabinet in the world”
“There are too many ministers and deputy ministers who do not have a proper job”