“In all, positive news – although there were no headline grabbing measures, and there is still no concrete safeguard against the potential loss of South Africa’s investment grade status.
The big takeaway from the budget was the faster pace of fiscal consolidation that is planned – not so much in the current fiscal year, where there is a very slight widening of the budget deficit, but in the years that follow. This is no easy achievement, given the halving of expected real GDP growth in 2016.
Encouragingly, the fiscal consolidation will be achieved through a combination of spending cuts and tax measures. Spending on the public sector wage bill is to be reduced, largely through planned reductions in headcount. The tax measures that are proposed for FY 17 are small – largely, tweaks to capital gains tax, an increase in the fuel levy by 30 cents/litre, and other modest measures, such as an introduction of a sugar tax. Looking at expectations for the medium-term though, there is still a commitment to do more – and these are already incorporated into forecasts. A rise in the rate of VAT or the top rate of income tax cannot be ruled out over the medium-term– the former in particular will likely drive even greater revenue increases than that tabled today.
From our perspective, the really encouraging news is the achievement of a primary fiscal surplus – for the first time since the global financial crisis. On a consolidated budget basis, this is expected from FY 17, with the primary surplus as a % of GDP rising over the medium-term.
This is significant and deserves highlighting. It means that despite the challenges, South Africa’s net borrowing requirement is expected to fall over the medium-term, and debt ratios will stabilise – earlier than previously thought (FY 18 vs. FY 20) and at a modestly higher level (46.2% vs. 45.7%).
How robust are these forecasts though? Debt servicing costs are an increasing concern, with 12 cents out of every rand of revenue collected now needed for debt service. SOEs still pose a risk to public finances, and deeper reassurances on reforms will likely be needed to mitigate this threat.
In all, the budget represents a positive outcome. Fiscal consolidation is on the horizon. The composition of spending is improving with reductions in the public sector compensation budget, although room for meaningful capital expenditure is still squeezed.
The problem is that we still do not know what is going to drive growth in South Africa. In the context of an economy where per capita incomes are falling, and the medium-term growth outlook remains the weakest since 1997 when MTEF planning began, this is still a big worry. South Africa’s retention of its investment grade rating remains a difficult call.”