A Good Budget Under Trying Circumstances

Gordhans 2017 budgetOnce again, under the most trying of economic and political circumstances, South Africa’s finance minister, Mr Pravin Gordhan, yesterday managed to deliver quite a balanced Budget, albeit a considerably more painful one than in previous years. To unpack and fully understand it, one has to analyse it both in its economic and political context.

From the political perspective, in stark contrast to President Jacob Zuma’s recent delivery of the State of the Nation Address, Mr Gordhan’s presentation of the national Budget yesterday was, as usual, a sober and dignified affair, studiously avoiding the populist radicalism Mr Zuma was accused of nailing to the national policy mast two weeks ago.

Mr Gordhan does not write his Budget speech in isolation. Following a 10-month interdepartmental process, final inputs from his party and his colleagues probably came at an ANC leadership meeting convened on Monday. Therefore, the speech did contain references to President Zuma’s “radical economic transformation”, but Mr Gordhan moderated its impact by framing it within a reasonable plea for inclusive growth for all South Africans.

Underpinned by his clear reasoning on the need for more equitable distribution of the national wealth, with which nobody quarrels, and supported by substantive figures, allocations and pragmatism, it took the radical populist sting out of the accelerated economic transformation policy President Zuma had announced. That should be cause for relief among many, as Mr Gordhan showed there’s no imminent, wholesale socialist revolution in the making!

But he did have a word of warning for us when he said, regardless of the language used to describe it, “Without the transfer of resources from the well-off to the rest of society, we will not have the social stability we’ve had”. The tax system he said, is crucial for redistribution and the Budget a critical lever for change.

Meanwhile, from our perspective a few things stood out in the Budget speech, chief among these being:

  • Further transformation and regulation of the financial sector, which we welcome, including the Financial Sector Regulation Bill, which will give effect to the ‘Twin Peaks’ regulatory system. Mr Gordhan hopes the bill will soon be passed, allowing for the establishment of a dedicated market conduct regulator.

 

  • The holding of a Financial Sector Summit this year, which will be organised by the Treasury in conjunction with other government sectors, labour and business in the National Economic Development and Labour Council (NEDLAC).

 

  • An increase in the top personal income tax rate from 41% to 45% for the approximately 100,000 taxpayers earning more than R1.5 million per annum, who will now collectively pay R4.4bn more in tax…the closest Mr Gordhan came to the previously much-speculated-about ‘wealth tax’.

 

  • An increase in the dividend withholding tax from 15% to 20%.

 

  • The ongoing Special Voluntary Disclosure Programme (SVDP) that will allow taxpayers with undisclosed offshore income and assets to declare these before the automatic exchange of information between international tax authorities starts on September 1, and which it is hoped will yield additional revenue.

 

Overall, against the background of global and domestic economic weakness, the Budget forecast revenue of R1.44-trillion, 7% more than last year, but R30bn lower than previously anticipated, reflecting a deterioration in economic growth and tax collection. The Budget deficit is set to decline from 3.4% in 2016/17 to 3.1% in 2017/18 and government will have to borrow R149bn to meet the deficit, paying R169bn in debt service costs on a massive debt of R2.2-trillion, or 50.7% of GDP, this year.

The weak conditions and pressures Mr Gordhan had to deal with are reflected in the fact that across the board personal income taxpayers will be hit by tax increases of R16.5bn for 2017-18, with a further R15bn in tax increases to be announced next year. Social grant increases are also small, while tax breaks were kept low in respect of bracket creep, a relatively small increase in the tax-free threshold on properties purchased, the small increase in medical tax credit, and limited relief for fiscal drag.

Mr Gordhan is very concerned about the current state of revenue collection in South Africa, as should we all be, and the “significant risks” it faces. For the first time since 2010, tax revenue growth did not match economic growth, delivering the largest underperformance since the 2009 recession. Meanwhile economic growth forecasts remained the same as in his October medium-term budget policy statement: 0.5% for 2016, 1.3% for 2017, 2% for 2018 and 2.2% for 2019.

Consumers will also be hard hit with substantial increases in indirect taxes such as on fuel, alcohol and tobacco, while the sugary tax announced last year, will be implemented later this year, and the zero-rating of VAT on fuel will be removed in the next financial year.

The larger revenue allocations again went to infrastructure spending, education and health, with an additional R5bn allocated to higher education in 2019-20, in addition to the total of R32bn over three years which was announced previously, making it the fastest growing part of the Budget. Measures were also announced to reinforce governance and accountability and clarify the development mandates at state-owned enterprises, one of the global rating agencies’ biggest areas of concern last year.

These then were some of the highlights contained in Mr Gordhan’s Budget speech.

In the days before the Budget there was much speculation about the political future of both Mr Gordhan and his deputy minister, Mr Mcebisi Jonas, in the context of internal tensions in the ANC and government. But Mr Gordhan managed to largely steer well clear of the political landmines, although the undercurrents were certainly present in the House yesterday.

This was evident, for instance, in the ovations both men received from especially opposition MPs, but also from some ANC MPs. With the Budget now safely delivered, the only remaining question is what the future holds for Mr Gordhan himself.