With South Africa currently in a mild recession and growth below what it was in 2017, consumers are increasingly under pressure. South Africa is also facing an election year next year, meaning Cyril Ramaphosa is at a critical point in his presidency. As such, all eyes will be on the Medium-term Budget Policy Statement (MTBPS) next week, delivered by newly appointed Finance Minister, Tito Mboweni.
According to Old Mutual Investment Group Head of Economic Research, Johann Els, the numbers for the current fiscal year are actually looking better than feared given the recession. “Revenue is running ahead of target and spending is actually below target,” explains Els. Consequently, next week’s Budget should get fairly close to February’s Budget targets set earlier this year. Compared to the February budget target of a deficit ratio – to GDP – of -3.6%, the MTBPS might target that at around -3.7% or -3.8%, which is a pretty good outcome considering the weak economy.
“I certainly don’t foresee a big shortfall in terms of revenue. Yes, Minister Mboweni has to reprioritise the R50 billion expenditure set aside for the stimulus package, which will have to move to other areas of the Budget and might be somewhat challenging; but in terms of overall budget, they should get fairly close to the target."
Els adds that while we are by no means out of the woods, the last thing Government wants to do is increase taxes significantly next year. “They won’t announce tax changes in the MTBPS as this is not the forum to do this, and we don’t expect further hikes in tax rates in next February’s Budget, which would further hurt the economy,” he says. “They might not allow for full fiscal drag relief – where inflation pushes taxpayers into higher tax bands. So we could pay a little more tax if they don’t cut that back, but we don’t believe that they will increase the personal tax and VAT rates next year.
“Normal so-called ‘sin tax’ changes – i.e. higher excise & ad valorem duties – are likely. Minister Mboweni has also been in favour of a Wealth tax in the past, which might be on the cards, although we don’t expect this next year; perhaps in the next few years.”
Els highlights that it is crucial that South Africa stays on a path of fiscal consolidation by getting the Budget deficit lower, and in the current economic environment this means cutting spending rather than raising revenue. “The public sector Wage Bill, interest payments on Government debt and social grants currently make up 58 percent of Government expenditure, making up a significant portion of spending that we need to work on,” he explains.
“With SA facing an election year next year, there is pressure on Government to avoid cutting the Wage Bill, and we’ve already heard from the Job Summit that they won’t fire any public sector employees despite earlier comments that highlighted the need to reduce the size of the public sector work force. But the fact remains that we need to get the public sector Wage Bill under control and that is a difficult thing to do. Government will probably take the necessary steps after the elections, as there are other ways to keep public sector wages in check rather than firing people. They can offer voluntary retrenchments and refrain from filling vacancies after voluntary resignations. So there are a number of options available to them, there just has to be serious inclination from Government,” he adds.
Els concludes that the most important issues for government to focus on will be to get economic growth going and to stabilise state-owned enterprises. “These steps would go a long way towards putting fiscal policy on a healthier path,” he points out. “We are looking forward to faster policy adjustments after the elections next year as these could help to create an environment where consumer and business confidence are markedly lifted. This should be a significant start to a stronger foundation for higher economic growth. Once the SA economy starts on a stronger footing, the President’s investment plan will also get some traction and growth in the region of three to four percent from 2021 onwards could become a real possibility.”