Since 2010 there has been a predictable narrative associated with the Budget Speech. We are living in tough economic times; the Budget is a fine balancing act of scarce resources and the public needs to tighten their belts.
Over the years, this narrative was reinforced through the assistance of a number of key tax increases in order to increase revenue. However, since Cyril Ramaphosa was elected the President of South Africa, there has been an air of positivity that this could be a year of change.
FAnews spoke to Isaah Mhlanga – Executive Chief Economist at Alexander Forbes Investments – and Rowan Burger – Head of Strategy at Momentum Investments – to find out what you can expect from this year’s budget.
Don’t expect much
Mhlanga warns that people must not expect anything ground breaking in this year’s budget.
“There is very little room to manoeuvre in this budget. Expenditure is up and revenue is down. However, there is some good news in that our fiscal deficit is looking a bit better than it did a year ago. Despite this, the road to recovery is still very long,” said Mhlanga.
He added that growth has been declining for some time, but expenditure has been increasing. This needs to be managed, particularly when it comes to social spending (expenditure on grants).
Hope for Eskom
Just when everybody thought that there was no hope for Eskom, Mhlanga reported that Eskom will actually be a highlight of the Budget.
“The one thing that most people are looking forward to is a bit more information into the financial support for the unbundling of Eskom. Ramaphosa made the unbundling announcement during his State of the Nation Address, and an unbundling announcement with financial support will be a credit neutral announcement. Even credit ratings agency Moodies alluded to the fact where they said that if government were to announce an unbundling plan without financial backing, it would be negative and their outlook on the country would be changed from neutral to negative,” said Mhlanga.
He added that we can expect to see a financial assistance plan that will be worth about R20 billion.
If you were happy that there were no changes to personal income tax (PIT) in 2018, then it is your time to feel happy again. Mhlanga said that there will be no increases in PIT because it is an election year.
This will also be a major influencing factor behind not increasing the VAT rate. “The 2018 increase in VAT was the first increase since 1993. And even then, government came under significant pressure and had to make an announcement about a lot of additional zero rated products. It really wouldn’t make sense for Treasury to increase VAT again.
This is where the buck stops though. “The public will have to find another notch that they can use to tighten their belts. The fuel levy will be increased again, and this will have a direct impact on the consumer. Consumers will need to find a way to become fiscally disciplined,” said Mhlanga.
One hand cannot clap
There is an English proverb which says that one hand cannot clap.
As both hands need to work in tandem, so the financial services industry is affected by a depressed economic environment.
“The financial services industry thrives when the rest of the economy is thriving. We therefore find ourselves much like the rest of corporate South Africa in need of good news from the budget,” said Burger.
Unfortunately, there is not the fiscal space for tax cuts and large infrastructure spending projects that will get the economy going. “Following on from the State of the Nation speech, a budget that sets out concrete plans to deliver the President’s aspirations will go a long way to restoring business confidence and getting corporate investment going in the economy too,” said Burger.
Government has recognised that the country needs an investment awakening and began a narrative in 2017 which stated that there should be greater financial inclusion in the country; ideally – according to government – this would include lower income earners.
However, this is easier said than done in a struggling economy. “Our research has found that many financially vulnerable individuals tip into financial distress as a result of a financial emergency. Financial services products are designed to protect against these misfortunes. Therefore, the stability of our social fabric requires a better distribution of social and insurance protection,” said Burger.
Follow the pecking order
He adds that insurance tends to follow banking in the order of financial need. According to Burger, more should be done debating how new technologies may unlock opportunity in a market that has been very difficult to participate in where there is fair reward for both clients and shareholders. “In order to get new diverse thinking to solve the problem, the financial services sector must do more to transform its workforce,” said Burger.
“A key unseen area where insurers look to help grow the economy is how they deploy the savings of their clients and their shareholder funds. There has been much discussion between government and the industry to find ways that public/private partnerships can develop job creating projects to the mutual benefit of clients and the country. Lifting the general lot of all South Africans enables an opportunity to access financial services products and a bigger market gives insurers scale to be able to operate. Sometimes there is a gap in the market because there is no market in the gap,” said Burger.
The public and the financial services industry will be waiting with eager anticipation to hear the Budget speech. Do you feel that this will be a positive year for the industry? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts email@example.com.
Article published cortesy of FANews