Commodities could give budget relief
The commodity market bounce and higher-than-expected inflation may have come to Finance Minister Pravin Gordhan’s rescue, providing a last-minute boost to revenue collections ahead of Wednesday’s budget, and enabling him to reduce the sum he needs to raise in extra taxes to about R21bn for 2017.
Revenue collections will still fall well short of last February’s target, while a weak economic growth outlook and the threat of a ratings downgrade will keep the pressure on Gordhan to rein in spending and deliver on promises to reduce the deficit over the next three years.
Gordhan had to slash his three-year forecasts for economic growth and revenue collections when he presented his medium-term budget in October, after they had already been revised down in February. To prevent the fiscal deficit (the gap between spending and revenue) ballooning he lowered the government’s self-imposed expenditure ceiling and pencilled in R43bn of unspecified additional tax measures for the next two fiscal years (2017-18 and 2018-19).
Efficient Group economists Francois Stoffberg and Dawie Roodt said on Monday the minister "overdid it a bit on the revenue forecast" and Efficient’s calculations indicate Gordhan could collect R7.8bn more in revenue than he budgeted for in October, reducing the R28bn in additional taxes that had to be found for the 2017-18 fiscal year to just more than R21bn.
Old Mutual Investment Group senior economist Johann Els projects Gordhan had to go bigger on tax increases and expenditure cuts to make up for a R5bn shortfall, which reflects slight overspending and slower tax growth.
Standard Bank chief economist Goolam Ballim said on Monday the resource bounce had the potential for mining companies to deliver a better year for state coffers. It might have begun to filter through in the first quarter of 2017. Mining revenue, which over the past decade has swung from 18% to 6% of the corporate tax take, might help to close the gap. There would still be a substantial revenue shortfall relative to the original February 2016 budget.
Roodt said higher-than-expected inflation also helped revenues, in particular from value-added tax. Efficient projects VAT collections will come in R6.8bn ahead of October’s medium-term budget forecasts while R3.8bn more will be collected from corporate income tax than was projected in October. There will be a R3.2bn shortfall in personal income tax collections. Other taxes such as the fuel levy will also fall short.
All three ratings agencies have SA on negative outlook and will be watching to see whether Gordhan can deliver on the government’s commitment to bring the main budget deficit down from an estimated 3.8% in 2016-17 to 3.1% in 2019-20, as he promised in October
Roodt expects a 1.5% economic growth rate for 2017, higher than Gordhan’s October forecast of 1.3%, thanks to "nice big double-digit growth in agriculture". There was much political risk to the growth number.
All three ratings agencies have SA on negative outlook and will be watching to see whether Gordhan can deliver on the government’s commitment to bring the main budget deficit down from an estimated 3.8% in 2016-17 to 3.1% in 2019-20, as he promised in October, and stabilise the debt ratio.
Ballim said for the rating agencies the "tick-box" question of whether the budget would pass muster was now less acute than the larger issue of the political leadership of the Treasury and the risk of personality change and policy deviation.
Standard Bank’s models show a more than 50% probability of a ratings downgrade.
Business Unity SA (Busa) said on Monday it hoped the budget speech would emphasise the fiscal balance required for SA to facilitate investment and achieve inclusive growth to meet SA’s developmental objectives.
"While business recognises that increases in certain taxes are required, the inability to grow the economy inclusively and to create sustainable employment means such increases need to be kept to a minimum. They should not be extracted in such a way as to deter investment in the economy," said Busa CEO Tanya Cohen.
Business remained profoundly concerned about continued loss-making by state-owned enterprises, Cohen said.