Mini Budget in Summary

Mini BudgetOn Wednesday South Africans held their breath in expectation as Finance Minister Pravin Gordhan delivered his medium-term budget policy statement – popularly known as the mini budget – in an atmosphere of unprecedented political turmoil.

We all wondered if the minister – with his back against the economic wall and a politicised court case over his head widely believed to be engineered by enemies in his own party – would be able to deliver the required medicine in such dire circumstances.

What followed was a solid performance, vintage Gordhan, and sobering food for thought. While Mr Gordhan was, in my opinion, perhaps more subdued than on previous occasions, his message was very clear. It called all of us to silent reflection on the need to roll up our sleeves, put our differences aside and together get our country back to work.

As Mr Gordhan said twice in his speech: lions that fail to work as a team will struggle to bring down even a limping buffalo. We fully concur. The benefit of team work is something that we here at Carrick understand well.

Minister Gordhan delivered a deeply introspective medium-term budget policy statement (MTBPS) that reached far beyond the narrow confines of his portfolio. It was a “take it or leave it” kind of budget speech, or in Mr Gordhan’s own frequently repeated words: “It’s up to us”. For those among us who take his words seriously, the medicine might be somewhat bitter, but it brings renewed hope of a better life for all in an economically improved South Africa.

While Mr Gordhan studiously avoided getting blatantly into the political fight ring and largely stuck to the main purpose of the MTBPS – talking about government’s finances and plans for the next 3 years – the political undertones were inescapable. Clearly corruption and self-serving politicians weighed heavily on Gordhan’s mind, and by implication, the actions of his political detractors.

But he managed to cut through the clutter and deliver the financial punches where they are needed. That Gordhan has the political support of most South Africans to do his job was clear from the standing ovation he received the start of his speech in the National Assembly, from all parties on all sides of the house. It must have had his political detractors, who were also sitting there, feeling rather uncomfortable.

For South Africans, and for the credit ratings agencies watching like hawks from the sidelines, his message was clear: I will get our economic machine back to steam if you do what I ask and allow me the space to do my work.

Before delivering the budget statement, Mr Gordhan reportedly told the media that South Africa was not in a “hopeless” situation, as long as it created a situation of policy certainty and economic stability for investors.

The core elements of Mr Gordhan’s MTBPS covering the next 3 years included reassurance that fiscal consolidation will strenuously continue; South Africa is at a crossroads in a difficult economic transitional phase in which consolidation and balance will be key; debt and government spending will be reined in; taxes will go up next year to compensate for revenue shortfalls; public sector employment will be reduced; and unforeseen allocations had to be made, especially to higher education.

In a nutshell, the picture Mr Gordhan painted and the ‘work’ that he laid on the table, entails the following:

  •  Against slowed global growth, South Africa’s own growth prospects are adjusted downward to 0.5% this year, rising to 1.7% next year, with a rider added that “if we do the right things to support investment and confidence, our economic recovery will be more rapid”.
  • Measured and balanced fiscal consolidation will continue over the period ahead, with the budget deficit declining from 3.4% this year to 2.5% in 2019/20. Debt is projected to stabilise at just less than 48% of GDP. And provinces and local government will be receiving less money.
  • Following this year’s tax revenue shortfall of R23-billion, substantial tax increases are on the horizon as Treasury seeks to raise an additional R43-billion through tax measures over the next 2 years: R15-billion already announced in February, R13-billion in 2017/18 and R15-billion in 2018/19. Mr Gordhan did not indicate whether this would come from raising corporate income tax, personal income tax or value-added tax (VAT), all politically unpopular, or from other tax measures such as e.g. a wealth tax.
  • Consolidated government expenditure is set to rise by 7.6% a year over the 3-year period. The 2016-17 year will see the toughest curbs with spending growth of only 0.1% in real terms, increasing gradually over the next three years as growth prospects improved. The cap on expenditure is reduced by R10-billion in 2017/18 and R16-billion in 2018/19.
  • The big question was where Mr Gordhan would find extra money for additional allocations, but he did, and these were proposed mainly for post-school education, health services and social protection. Higher education received the bulk at a massive allocation of R17.6-billion more, in addition to the R16-billion added in February. Overall average growth of post-school education and training is 9.2% per year, surpassed only by the growth of debt service costs (10.1%) among all budget items.
  • Over R900-billion will be invested in infrastructure over the next 3 years, mainly in energy, transport and telecommunications.
  • Mr Gordhan also prioritised more efforts to improve supply chain management, increase transparency and ensure greater value for money in public service delivery.

From Carrick’s point of view, of special interest to us were Mr Gordhan’s remarks on financial sector reform. He noted that legislation to give effect to the “twin peaks” regulatory reform programme is expected to be finalised by the end of this year. Its impact, he said, would be to reduce and make more transparent the cost of financial services; to simplify retirement saving options by means of default regulations; and to encourage innovation through more competition.

Two new exchanges were licensed this year, and regulations to create a more competitive environment for clearing and reporting trades are being finalised, with consultation on a regime for licensing trade platforms set to begin. Disclosure initiatives will aim to make it easier for ordinary people to understand complex financial products.

All things considered, one must commend Minister Gordhan for doing a decent job under difficult circumstances. His mini budget brings hope and if all that he envisages is achieved, things can only get better. Let’s hope the ratings agencies also see it that way.

As the country enters turbulent times, so too does Chris Bertish who will be entering turbulent seas to SUP (stand up paddle) 7500km unassisted from Morocco to Florida for charity.  Carrick is proud to be the official title sponsor for the SUP crossing and we wish Chris all the best of luck. Find out more about this incredible adventure here.

 

Craig Featherby

Group Managing Director