/ 24 February 2016

Budget 2016 wrap: A little love for everyone

Pravin Gordhan.
Pravin Gordhan.

This February, Finance Minister Pravin Gordhan is everyone’s Valentine. But civil servants may feel he’s handing out empty boxes of chocolate and wilted roses.  

On Wednesday, Gordhan faced the unenviable task of presenting a budget speech that straddled almost impossible territory. He did it with an almost abrasive optimism – one that, at times, seemed disingenuous with the economic and social desperation that has gripped many South Africans. He had a melody in his heart, repeated as a refrain throughout his speech: “We are resilient. We are committed. We are resourceful.” 

And his precarious position called him to do just that. 

Gordhan was well aware of demands to alleviate the plight of the poor, oversee better service delivery, aid students unable to fund their university fees, champion land reform and institute a state-wide minimum wage. 

On the other hand, he heard the urgent plea to avoid a ratings downgrade to “junk” status and knew of business’s frustration with unclear policies and a fraught labour environment. He knew of the crippling drought that has pushed 50 000 people below the national poverty line and seen white maize prices soar by 140% in a year. He knew of the volatile rand that hit R17.99/$ on a memorably grim day in January, the weakened demand for resources and that inflation had broken the upper 6% bracket. He knew of a government debt-to-GDP ratio that was nearing 50% and a crippling public wage bill that was keeping South Africa’s unemployment rate of 25% from climbing even higher. 

His response was a little love for everyone, even if it was restricted to rhetoric. 

But the driving force behind his message was that the bloated government wage bill would be under some serious pressure to reduce. 

Gordhan said government would cut the expenditure ceiling by R25-billion over the next three years, “mainly by curtailing personnel spending”. While the speech mentioned little more than that, the budget review expounded. 

“To continue operating within budget limits … government departments will need to adjust their human resource plans significantly,” said the minister. This means: 

  • Effective April 1 2016, appointments to non-critical vacant posts will be blocked on government’s payroll system, and only sanctioned after departments have submitted revised hiring plans;
  • Departments will be encouraged to reduce personnel headcounts; 
  • Compensation budgets will be strictly monitored;  
  • Government departments will be legally limited in their appointment of contract staff. 

In addition, the office of the chief procurement officer is reviewing state-owned contracts above R10-million (Eskom accounts for 65% of the country’s expenditure on guarantees, the review noted); and the officer was expected to save R25-billion a year by 2018/19.   

Contingent on these savings, the government could offer an additional R16-billion to higher education over the next three years (R5.7-billion in the current year), an extra R11.5-billion to social grant allocations over the same period, spend R4.5-billion on National Health Insurance pilot districts and R1-billion for drought relief this year. Not only that, but this ministerial Valentine is sparing the electorate from a widely-anticipated tax hike – this year anyway. 

Revenue increases   
Instead of hitting taxpayers on the personal income front, the government will raise an additional R18.1-billion in tax revenue through alternate methods. This will comprise of:

Fiscal drag limit – projected to bring in a total of R7.6-billion

  • Limiting relief for the effects of inflation on personal income tax, or so-called “fiscal drag”. According to a treasury official, tax brackets have only been partially adjusted to compensate for inflation. “This means that we will collect more due to the inflationary impact on wages and income,” he said. 

Indirect taxes – projected to bring in a total of R9.084-billion 

  • Increasing the fuel levy  by 30 cents per litre, 
  • Introducing a tyre levy of R2.30 per kilogram of tyre 
  • Increasing the incandescent globe tax from R4 to R6 per globe 
  • Increasing the plastic bag levy from six cents to eight cents per bag 
  • Increasing the motor emissions tax rate from R90 to R100 for every gram of emissions/km above a certain rate for passenger vehicles, and from R125 to R140 for double cabs. 
  • Increasing excise duties on tobacco and alcohol (rates will vary depending on the product imported) 
  • Taxing sugar-sweetened beverages: this is proposed as a way of helping to stem South Africa’s grave obesity and diabetes levels, is proposed to be introduced on April 1,2017 and an amount has not yet been stipulated.      

Taxes on property – projected to bring in an additional R100-million

  • “The transfer duty rate on properties above R10-million will increase from 11% to 13%,” said the minister in his speech. 

 Capital gains tax – projected to bring in an additional R1-billion

  • Government proposes increases that will raise the “maximum effective capital gains tax for individuals from 13.7% to 16.4%, and for companies from 18.6% to 22.4%”. 

Gordhan hinted that a VAT increase is on the cards in the medium term, where the Treasury hopes to raise an additional R15-billion in revenue each year for the two outer years. “The current tax mix suggests that there may be greater room to increase direct taxes, such as VAT,” he noted in the budget review. “Any proposals along these lines would need to be accompanied by measures to improve the pro-poor character of expenditure programmes so that the fiscal system remains progressive.” 

And austerity measures could rise dramatically in the event of a downgrade, Gordhan warned. “In a more benign scenario, a downgrade would probably lead to a short-term spike in interest rates and further weakening of the rand,” he said. “In a less favourable scenario, it could trigger a sharp reversal of capital flows and precipitate a recession. In such an event, aggressive austerity measures would likely be required to restore the public finances to a sustainable position.” 

Government expenditure
Consolidated government expenditure is expected to grow by 7.1% over the medium term, reaching R1.69-trillion in 2018/19. “At this rate, spending growth will outpace inflation by 0.8%,” noted the minister in the budget review. 

Efforts will be made to lower the expenditure ceiling by R10-billion in 2017/18 and R15-billion in the year after. Government expenditure will go from 33.3% to 32.8% during this time. 

Nevertheless, Gordhan says the combined efforts of curbed expenditure and tax revenue increase will begin to reduce the government’s debt-to-GDP ratio in the medium term. By 2017-18, net debt is projected to “stabilise” at 46.2% in 2017-18. 

Over the next three years, the government’s borrowing requirement will go from R221.6-billion this year to a projected R201.6-billion in 2018/19; down from 5.1% of GDP to 3.9% of GDP over the period.  

Despite these efforts, debt service costs will increase from 3.2% of the GDP this fiscal year to 3.5% of GDP over the three years. 

Local government will be hardest hit by baseline reductions in expenditure. Over the medium term, local government will see a R6.8-billion retraction in its baseline, amounting to 2.2%. Provincial and national government baselines will be docked by 0.4% and 0.8% respectively.

Nomura emerging markets economist Peter Attard-Montalto expressed his view on this in a pre-budget note: “We think a lot of cuts will be buried in unspecified austerity, pushed down into the provinces and local government,” he said. “We think the provinces will be allowed to have a greater say, and take the political can for austerity decisions.” 

Voluntary disclosure programme for offshore assets and income
In a further attempt to increase cash flowing into the country, the minister announced a “Special Voluntary Disclosure Programme”. It provides for a six month window period during which non-compliant taxpayers can disclose offshore assets and income without facing penalties or criminal prosecution. 

Gordhan was at pains to ensure that every major stakeholder felt heard. “We must address institutional and regulatory barriers to business investment and growth,” he told the ratings agencies, aware that they seek cues of microeconomic stability and reform. “Progress has been made towards a minimum wage framework,” he told the unions. 

“We are responding to action in communities where services are missing or badly managed,” he told the disgruntled electorate. “We are crafting solutions to the voices of students regarding fees and housing,” he told increasingly violent protesters on university campuses.  

And to underscore it all, his parting quote was from Nelson Mandela: “There were many dark moments when my faith in humanity was sorely tested, but I would not and could not give myself up to despair.”