Mid-Term Budget to be revealed on 26 October

Finance Minister Pravin Gordhan’s presentation to Parliament of the medium-term budget policy statement – known as the mini budget – on Wednesday is likely to be more notable for its lack of action on key constraints facing the economy than the bold reforms required to avert possible downgrades by the rating agencies. With the threat of arrest and fraud charges hanging over him, Gordhan may be hesitant to deliver the structural reforms required to reignite South Africa’s growth, or to tackle the growing debt burden of state-owned enterprises.

Instead, in seeking to convince the rating agencies that he remains steadfast on prudent fiscal management, the minister is likely to present a framework big on fiscal consolidation and spending reductions. However, the budget deficit is still likely to slip beyond the targeted 3.2% of GDP to 3.4% and Gordhan is also likely to revise his growth forecast from the 0.9% he expected in February, after the economy performed worse than expected. The independent advisory body in the Parliamentary Budget Office expects the 2016 GDP growth to be between 0.1% and 0.4 % – mainly because of lower global growth and a poor outlook for investment and consumption spending by indebted households.

“Markets have finally come to the view that Gordhan cannot alter policy such that disparate forces from across government can be brought together, when there is no centralised leadership on structural reform,” said Peter Attard Montalto, emerging markets economist at investment bank Nomura, based in London. “Ultimately, it seems very unlikely there will be any structural reforms offered that would result in the rating agencies raising their medium-run growth expectations.”

The Chamber of Mines SA, which, together with other business organisations, has been working with the government to avoid a ratings downgrade, said it wanted to see “prudence, discipline and constraint” on expenditure by state-owned enterprises. “It is important that a ratings downgrade is avoided, given the grave consequences this could have,” said chamber spokesperson Charmane Russell.

Eskom’s debt, as well as that of other parastatals, has soared to R467 billion, with the state’s exposure at R258 billion. This has helped push total government debt to just below 50% of GDP, which Treasury has committed to maintain. Already, debt servicing costs eat as much as 12% of GDP, raising concerns that if left unchecked, South Africa may be heading for a crash similar to that of Brazil.

Labour analyst Mamokgethi Molopyane said civil service unions were awaiting a decision about a mooted increase in VAT from 14% and a reduction of the government wage bill. They would not countenance any increase in personal income tax in the current environment where jobs were scarce. However, Investment Solutions chief economist Lesiba Mothata said he expected tax increases to be on the minister’s agenda, given the shrinking fiscal space amid slowing economic growth. “While there is a global push to ease fiscal policy, especially through tax reductions, Treasury’s disposition is one in which higher taxes are firmly on the table,” Mothata said. “There is a chance that a higher income tax bracket or even a direct wealth tax will be introduced.”

Gordhan is also likely to pronounce on the thorny issue of funding free university education. With the bill set at more than R90 billion over the next three months, analysts say government will have to rethink its spending. “The spotlight will also be on how the minister plans to [help] close the latest tertiary education funding gap that has arisen from the recent decision by Higher Education Minister Blade Nzimande,” said Rand Merchant Bank’s Ettienne le Roux. “Among other factors, certain spending budgets will have to be reprioritised to make this happen.”

We expect a smooth, polished and uncharacteristically sombre budget speech, a far cry from the country’s fiscal highlights once presented by Trevor Manuel. Stability and sound fiscal regime are the key-words when it comes to manage an ailing economic giant like South Africa. This elephant remembers but is unable to learn new tricks within a day.

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