National Treasury and finance minister Tito Mboweni have run out of wiggle room with South Africa’s finances – so don’t expect any panaceas, bold moves, or major policy shifts to come out of the 2020 Budget, says Intellidex.
“The bar is being set low for the budget which means that, notionally, expectations can be met. But the market is confused about what is a good outcome and what is not,” said Intellidex analyst Peter Attard Montalto.
Treasury has no political capital to back the big-item changes it needs to plug South Africa’s growing budget deficit (i.e. cutting the government wage bill), and it cannot turn to taxpayers to find more revenue without pushing them over the edge of the Laffer curve and undermining tax collection.
Thus it sits in the unenviable position looking for some form of win – which according to Attard Montalto would be to focus on getting the budget back to the mid-term budget (MTBPS) position.
On the one hand, this wouldn’t do much to resolve South Africa’s longer-term budget issues (which will not placate ratings agencies) – but on the other hand, it could mean avoiding politically damaging moves like raising VAT again, while also not making things worse.
Treasury needs to find around R150 billion over the next three years to balance out South Africa’s budget. Intellidex’s analysis sees government able to recover around R24.4 billion in the 2020/21 budget relatively ‘easily’, which would do ‘enough’.
This would be accomplished through a minor boost in revenue collection (taxes, bracket creep, etc), while the bulk would be through cutting expenditure.
According to Intellidex, the main source of revenue in the 2020 budget is likely to be raised through bracket creep – the non-adjustment of tax brackets for inflation.
This is an easy win for government because it’s not as obvious as a VAT hike, and also seems more “fair”, as it targets wealthier individuals. This could see R13.7 billion raised.
Sin taxes, increases in the fuel levy and Road Accident Fund contributions are all factored in. Sin taxes, especially, are expected to be bigger than usual. This is measured at adding R2.3 billion to the budget.
However, R10 billion which was “pencilled in” as possible future revenue in the previous budget, that was not realised, needs to be taken out, bringing the balance to R6 billion from revenue collection.
This figure, called ‘anonymous’ revenue, is potential revenue Treasury could chase through, for example, future VAT hikes, new taxes or tax brackets, that aren’t immediately evident in the current fiscal year.
On the expenditure side, Intellidex sees the main win being from government pushing forward money under spent in the previous financial year (R15.7 billion), as the big win. However this is difficult to track, it said.
As are the estimates on how much money government will put aside for bailing out state companies. Because most requests come after the fiscal year-end, and R6 billion of the contingency fund has already been used, the current best guess is about R5 billion being set aside, Intellidex said.
What not to expect
- A VAT hike is unlikely, following the fallout from the 2018 hike, and that it isn’t needed to get back to the MTBPS budget level, Intellidex said. That doesn’t mean another VAT hike won’t happen eventually – but it will require commissions, social grant increases and more admin to implement, so it will take time. Also because of this, and the associated costs, the R23 billion it could raise would be offset to about R17 billion.
- Wage bill cuts are a key battleground, and will see war talk in the speech, but not in the numbers. Negotiations for public sector wages take place mid-year and the process on anything around this needs to still happen. Pay freezes are more likely than retrenchments in any outcome.
- The sovereign wealth fund and state-owned bank talked up by president Ramaphosa are likely to be mentioned only in passing. This is more political than necessary, and the processes to get either off the ground will run over a number of years with many roadblocks on the way.
- Anything solid about Eskom is likely to be missing, as it is in the middle of an unbundling process, which is taking precedence. Many issues and suggestions (such as Cosatu’s plans to use state pensions) are still up in the air.
- The sale of non-core assets has been talked about for a decade, with no real movement. There’s nothing suggesting there is any credibility to any new statements about it. Spectrum sales could be the exception this – but having been delayed so much already, it’s more a ‘positive risk’, than a certainty.