Tax Hikes loom (Medium Term Budget by Nene)

Eagerly awaiting before the background of our ailing economy Finance Minister Nhlanhla Nene yesterday tabled a tough Medium Term Budget Policy Statement (MTBPS) in parliament, which will not be good news for everybody. But it provides evidence that Nene is aware of the limited resources at his disposal and is prepared to face the required trade-offs. Let’s hope that government as a whole shares his approach.

The “roadmap to safeguard the public finances” amid poor economic growth and a worsening debt outlook mainly consists of reducing the government’s expenditure ceiling and raising taxes over the next two years. This will reduce the budget deficit from the current 4.1% of gross domestic product and stabilise debt, now set to reach ZAR 2 400bn in 2017/18.

The MTBPS stresses fiscal consolidation is necessary to put public finances on a sustainable footing. There will be a greater focus on long-term expenditure planning and alignment with government’s policy objectives. Expenditure growth will, according to Nene, not compromise frontline services and social spending.

The end of stimulating and expanding SA’s budget cycle may have short-term consequences for the economy, but it is realistic and can build a platform for investment-led growth in the future. The highlights are:

# Tax: South Africans will pay more taxes from next year. The detailed proposals will be outlined in next February’s budget, but the mini budget mentions that policy and administrative reforms will raise at least ZAR 12bn in 2015/16, ZAR 15bn in 2016/17 and ZAR 17bn in 2017/18.
# Reduced spending: Government will lower its 2014 budget expenditure ceiling by ZAR 25bn over the next two years. Reductions will focus on non-essential goods and services – for example, planned expenditure on travel and subsistence across national departments has been cut by R555m and on consultants R370m. Together with tax measures, it will improve the fiscal position by ZAR 22bn in 2015/16 and ZAR 30bn in 2016/17.
# National government’s personnel budgets will be frozen, and funding for vacancies will be reviewed.
# The largest spending allocations over the three-year spending period ahead will be on basic education and skills development (15%; ZAR 833bn), health (11%; ZAR 500bn) and social protection (11%; just under ZAR 500bn).
# The budget deficit will be reduced in line with targets in the 2014 Budget (3.6% in 2015/16, 2.6% in 2016/17 and 2.5% in 2017/18).
# ESKOM will receive a direct allocation of ZAR 25bn from the sale of non-strategic state assets. This will not carry any direct costs to taxpayers, and any help to state-owned companies will be budget-deficit neutral. Any capitalisation will not widen the budget deficit.
# National government’s net debt will stabilise at 45.9% of GDP in 2017/18 (ZAR 2.4trn), declining thereafter. Debt service costs will grow at 9.3% per year – faster than the budget as a whole – reaching about ZAR 150bn in 2017/18.
# Economic growth is projected at 1.4% this year (in line with other forecasts), 2.5% next year and 2.8% in 2016, and inflation at around 6%. Food inflation is expected to recede from current levels thanks to buoyant global and domestic production. SA’s growth figures are lower than both those forecast by the International Monetary Fund for Africa (between 5% and 6%) and emerging markets in general (between 4.4% and 5.2%).
# Over the medium term there will be increased exploration for on- and offshore oil and gas, by developing an exploratory drilling plan and legislation.
# The focus on development of cities will be through a new approach to local government infrastructure financing.
# African Bank: Government has provided a ZAR 7bn backstop to the SA Reserve Bank (SARB) in line with international practice, but it is unlikely that SARB will draw on this facility.
# The government’s total wage bill will be ZAR 440bn this year, expected to rise to ZAR 470bn next year.
# About ZAR 500bn of social protection (pensions and social grants) will be paid out over the three-year period of the MTBPS.

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