T
his year, 2015 saw a somewhat better than expected budget showing
lower than previously projected debt for the medium-term (net debt now
projected at 43.7 percent in 2017/18 from a MTBPS estimate of 45.9
percent of GDP), while the fiscal deficit averages exactly 3.0percent of
GDP over the medium term. This should certainly placate the rating agencies,
with the main budget primary balance reaching 0 percent in 2017/18, evidencing
sustainable future government finances. However, personal income taxes were
raised (as expected by 1 percent) which is not good news in a slow growth year
where the consumer is financially vulnerable, with taxes raised by 1 percent per
income category from the threshold of R181 901 per annum. R8.5bn occurred in
inflation (fiscal drag) relief. Both corporate tax and VAT were left unchanged, but
this was expected.
Projected revenue collection for 2014/15 was essentially in line with the 2014
MTBPS projection, at R1 091bn, while expenditure was marginally curbed to R1
243bn, from R1 247bn (MTBPS projection), allowing the budget deficit to dip to
-3.9 percent of GDP from the previously forecast - 4.1 percent of GDP. 2015/16
sees a higher fiscal deficit of -3.9 percent of GDP (MTBPS - 3.6 percent) but the
years 2016/17 and 2017/18 were left unchanged, at -2.6 percent and -2.5 percent
of GDP respectively. The deficit and debt developments (as percent of GDP) are
positive, with SA avoiding fiscal slippage. Main budget non-interest expenditure
has been reduced by R25bn over the next two years. Real non-interest
expenditure growth rises from previous projections, which is not positive. Fiscal
consolidation is likely for SA if the budget is maintained, which is a positive
outcome. We are cautiously optimistic on the outlook for the SA economy, with
government forecasting growth of 2.0 percent year-on-year for 2015, and our
forecast slightly above that at 2.4 percent of GDP.
The number of tax payers earning over R500 000 per annum is now estimated at
783 421, out of a population of 54 million, with 16 million on social welfare and
71 percent of the estimated R1.1 trillion in revenue for 2014/15 spent on social
services. The number of individuals on social welfare will rise to 17.5 million in
2017/18, with expenditure on social grants falling to 3.0percent in 2017/18 of
GDP from 3.1 percent of GDP in 2014/15, showing a stabilisation in costs.
This should reduce concern over perceived fiscally unsustainable populist
tendencies in government finances, while simultaneously showing firm
commitment to alleviating the suffering of the most vulnerable members of
our society. Personal income tax relief of R8.5bn for bracket creep is tabled
for 2015/16, down on the R9.3bn in 2014/15. However, the broad based tax
increase will impact consumers in a financially vulnerable year due to the high
indebtedness of many individuals, slowing growth in real disposable incomes
(which will be negatively impacted by the personal income tax increase) and
potentially higher interest rates.
Fiscal policy is tightening, the risk is that monetary policy errors cause SA interest
rates to rise too sharply over the next few years. Indirect tax adjustments for 2015
were mainly related to the traditional increases in fuel levies (30c/litre for the
general fuel levy and 50c/litre for the Road Accident Fund) and excise duties (of
between 4.8 percent and 8.5 percent on alcohol and between 5 and 7 percent for
tobacco products). The electricity levy is to be increased to 5.5c/kWh from 3.5c/
kWh. Carbon tax is to be introduced in 2016, and the increase in the electricity
levy is a temporary measure until then.
The revenue impact of the tax changes are R16.8bn, with a net rise of R8.3bn
after taking into account relief for fiscal drag. The tax proposals included
changing transfer duty and tax brackets, steps to combat base erosion and profit
shifting and providing a more generous tax regime for small businesses. Small
business sees a reduction in turnover brackets, from five to four, providing some
alleviation of their tax burden as a group. Base erosion and profit shifting remain
a key focus, with government to propose amendments. Transfer duties on
properties below R750 000 will be eliminated, decreased for properties above
this, but up to R2.25million, but increased substantially thereafter (to R85 000
plus 11 percent of property value above R2.25million). GDP growth is revised
down to 2.0 percent year-on-year for 2015, from the previous estimate of 2.5
percent of GDP, below the World Bank’s forecast of 2.2 percent year-on-year,
and below ours of 2.4 percent year-on-year. The 2016 forecast is lowered to 2.4
percent year-on-year from 2.8 percent year-on-year, but 2017 is left unchanged.
The focus is on rebalancing the economy, reducing the budget deficit and
stabilising debt. Government continues to focus on infrastructure, with R813.1bn
projected for infrastructure spending over the next three years. In particular, state
owned enterprises are to invest R362bn over the medium-term. Government
exposure to Eskom guarantees rose to R144.5bn in 2014/15.
‘Eskom is working to improve productivity and reduce costs. It … plans to apply
to the regulator for tariff increases that will move the price of electricity closer to
the costs of its production. Government’s support for Eskom includes a medium-
term funding allocation of R23 billion. Appropriations will be made to Eskom as
funds from the disposal of non-core assets are realised, ensuring that there is
no increase in government debt and no effect on the fiscal position. Government
could also consider other interventions, such as converting its subordinated loan
to equity to support Eskom’s balance sheet.’
The tax system remains under review by the Davis Tax Committee and today’s
announced tax increases are unlikely to be the last. Treasury has received some
findings, with the remainder due this year. The review will likely guide treasury
in its determination of tax rates in the 2016 budget. The committee says that
‘compared with rates in other countries, there appears to be some scope to
increase taxes on capital income, marginal personal income tax rates and indirect
taxes such as fuel levies and VAT.’ The budget still shows that current dissaving
is projected to cease in 2014/15, with government spending less than it earns
in current (tax) revenue from this period onwards. Current spending includes
compensation of civil servants, interest payments on debt, current transfers and
subsidies (which includes social services) and consumption of goods and services
by government. A surplus (current savings) is expected by 2015/16. This should
assist SA’s credit rating, which sits at BBB – from Standard and Poor’s with a
neutral outlook for the long-term foreign currency rating of SA sovereign debt,
to be maintained. A higher credit rating would require the electricity constraints
SA faces to be solved, and economic growth to
run persistently stronger, potentially above 4.0
percent year-on-year.
Annabel Bishop
Chief Economist of Investec Ltd.
Reichmans Holdings (Pty) Ltd is a wholly owned
subsidiary of Investec Limited
Annabel Bishop
I
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