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Commentary on the budget speech

The basis for the shift in the 2013 national budget was actually already set by a comment in the 2012 Medium Term Budget Policy Statement (MTBPS) released in October last year, which passed by virtually unnoticed. To quote: “In a lower growth scenario, an appropriate balance between spending restraint and new revenue initiatives would be necessary, taking into account the need to limit the potential impact on growth, employment and equity.”

Growth prospects for the economy have indeed deteriorated in the meantime, causing the National Treasury to revise downward its projections for future tax revenue. As far as “spending restraint” is concerned, Government initially thought that capping future expenditure at the levels set in the 2012 budget (i.e. not increasing them as per usual practice) would be sufficient. It has now acknowledged the necessity of going a step further by cutting these estimates.

The result is that non-interest expenditure is now budgeted to increase by 2,3% per annum in real terms over period of the medium-term expenditure framework, compared with 2,9% per annum at the time of the MTBPS. This is indeed a bold step that should be applauded; however, it was made necessary by Government allowing the public sector wage bill to balloon in the past four years and one could ask whether the cuts are deep enough. It also remains to be seen whether all sections of government will play ball to ensure the outcome is as budgeted. For example, will the provinces indeed comply with Government’s request that they budget for growing surpluses in the next three years?

According to the revised budget, main budget expenditure is projected to increase by 26,7% in the next three years, and consolidated expenditure by 26,4%. Nominal GDP, on the other hand, is forecast to increase by 33,1%, allowing the expenditure-to-GDP ratio to decline moderately. Of the projected 10% per annum average increase in nominal GDP, 3,5% per annum is accounted for by projected real economic growth, and the balance, viz. 6,5% per annum, by inflation. Government is therefore bargaining on the economy returning to its potential growth rate soon, which could turn out to have been an optimistic assumption. It acknowledges that the recent underperformance in growth is at least partly due to structural constraints, and it apparently assumes that those constraints will be removed in due course. But will they?

Its projections for the debt ratio depend furthermore on inflation remaining relatively high. It is therefore assuming that the Reserve Bank will be happy with CPI inflation averaging approximately 5,5% in the next three years. Judging by how monetary policy has been conducted since 2009, Government may well be justified in making such an assumption, but what does that tell us about the future of the inflation-targeting regime?

Very little further detail regarding the proposed study of the tax structure was forthcoming. However, it appears as if its purpose will be mainly to secure the necessary revenue to support the budget. It is interesting that it is acknowledged that the contribution from corporate tax could remain depressed some time, requiring other measures to fill the gap.

Judging by the few tax initiatives announced in the Budget, e.g. bringing e-commerce involving a foreign supplier into the VAT net, reviewing the rationale for tax expenditure items, the restrictions on the tax deductibility of interest by businesses, and increasing the tax take from the financial sector, the thrust of tax policy going forward will be to broaden the tax base rather than increase tax rates ? which is in principle a sound approach to follow.

On balance, the budget is probably a realistic response to the constraints to which the public finances are currently subject. However, there is a real risk that things could turn out worse than projected and that important fiscal ratios could deteriorate to a point where a further downgrade to South Africa’s credit rating, which will take it dangerously close to the minimum for an investment grade rating, could become a distinct possibility. The only defence against such a development will be more austerity, cutting government expenditure more or increasing taxes, or a combination of these.

South Africa will therefore remain on a fiscal tight rope for the foreseeable future.

  By Jac Laubscher, Sanlam Group economist.

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