Investment Implications - 2018/19 Budget Review

Finance Minister Mr Malusi Gigaba started his address by referring to the budget as “tough but hopeful” and reading through the detail we agree. Prior to the budget, we noted that the focus would likely be on the revenue side but it is the expenditure side that really surprised the market. 

 

Government increased its revenue projection by R36 billion. Among others, this will be attained through increasing value added tax (VAT) from 14% to 15%, raising taxes on estates over R30 million to 25%, implementing only partial relief for bracket creep, increases in the fuel levy, sin taxes, and higher excise duties on luxury goods.

 

There were no changes to income tax (besides the bracket creep), the corporate tax rate or dividends or capital gains tax.

 

On the expenditure side, government committed to finding savings of R85 billion over the medium term. Most notably in capital expenditure. As expected, grant payments were increased ahead of inflation to compensate recipients for the increase in VAT and capital expenditure will be negative in real terms. Government plans to keep increases on its wage bill (the largest part of the budget) at CPI+0%. Free tertiary education will be gradually introduced but following the R85 billion in savings, the dent was less than anticipated. The state is also expected to enjoy some relief in foreign debt interest payments because of the stronger rand.

 

Other points of interest:

  • Interventions at state-owned companies and some of these entities could be restructuring with equity investment.

  • Limits on offshore investments for institutional investors has been increased by 5% for all categories.

While the budget came across as credible, we highlight two specific risks to implementation – a higher than expected increase in the public wage bill and lower than expected tax buoyancy.