With Finance Minister Tito Mbowenischeduled to deliver the 2019 Budget Speech, in Cape Town, on February 20, expectations are high as the country waits to hear how he plans to balance competing expenditure priorities to stimulate economic growth, in spite of fiscal consolidation measures.
In the lead up to the anticipated event next week, professional services firm PricewaterhouseCoopers (PwC) on Wednesday discussed some of its projections and forecasts, with particular reference to the economy and tax implications, stating that following President Cyril Ramaphosa’s State of Nation Address (SoNA) on February 7, “there are great expectations on the shoulders of the . . . Finance Minister”.
Given the state of South Africa’s economy – economic growth has deteriorated in recent years, contributing to revenue shortfalls – and a deterioration in the financial position of State-owned entities (SoEs), PwC chief economist Lullu Krugel said improving fiscal sustainability would hinge on strong measures for driving economic growth.
Following the National Treasury’s forecast in October 2018 that gross domestic product (GDP) growth would slow to 0.7% in 2018, down from 1.3% in 2017, Krugel said the National Treasury would more than likely expect a moderate recovery in growth in the agriculture and mining sectors, combined with improving business and consumer confidence.
This, according to the Medium-Term Budget Policy Statement (MTBPS), should lead to an uptick in economic growth to 1.7% for this year and 2.1% in 2020.
However, PwC expects slightly lower economic growth of 1.6% this year and 2% in 2020.
Mboweni is also expected to report on the successes, so far, of Ramaphosa’s stimulus and recovery plan, which was launched in September 2018.
Unfortunately, business confidence and policy uncertainty deteriorated further in 2018.
As a result, PwC noted that, while the finance minister is expected to reiterate that South Africa is now a “much more business-friendly place”, it would bode well to provide some information on how the National Treasury is experiencing a recovery in investor sentiment and how Mboweni’s Ministry has supported efforts to translate investment pledges into financial inflows.
Meanwhile, the budget deficit is still growing, while government debt requires “urgent consolidation”.
While this is higher than the 4% of GDP projected in the MTBPS, it is largely as a result of a projected R10-billion increase in the shortfall in revenue collections compared with what the National Treasury had estimated in October.
PwC said it further expects a deficit equal to 4.7% of GDP in the coming financial year.
With many South Africans having expressed a concern about the ballooning State wage bill in the National Treasury’s “Tips for Tito” Twitter initiative, PwC noted that the 2019/20 budget plan would need to address difficult changes needed in the public sector wage bill, as fiscal consolidation remains a key concern for stakeholders and credit rating agencies alike.
However, with the worsening financial situation of SoEs over the past decade having emerged as a threat to South Africa’s fiscus, PwC averred that Mboweni would need to indicate the path forward for these entities.
“Tangible effort will need to be given to a strategy that gives a clear perspective to how government can drive [these enterprises’] developmental mandate, while ensuring they remain financially sound,” PwC said.
Further, rating agencies continue to remain a concern for the country and its growth prospects, PwC said on Wednesday, especially considering that South Africa’s sovereign debt has been downgraded to subinvestment grade by Standard & Poor’s and Fitch Ratings owing to the deterioration in its fiscal position over the past decade.
If rating agency Moody’s Investors Service were to also downgrade the debt to subinvestment level, South Africawould be removed from the Citi World Government Bond Index, PwC lamented, explaining that this would prompt asset managers to sell billions of rands worth of domestic bonds.
This would, in turn, sharply increase the cost of debt and pressure on the exchange rate.
It is for this reason that PwC said Mboweni would need to talk to the issue of fiscal consolidation, SoE reforms and measures to lift economic growth.
“By effectively outlining a path forward for South Africa’s fiscus, the Minister will be able to satisfy credit rating agencies and would steer the economy away from a subinvestment grade,” PwC said.
Krugel, however, remains cautious as she lamented that the possibility of a downgrade by Moody’s is “quite likely” in 2019. While this may not be immediately, she said that “a significant change” would need to be made to stop South Africa’s return to junk status.
Additionally, Mandy on Wednesday said the tax revenue situation was likely to get worse.
Based on revenue collections to the end of December, PwC expects tax revenues for 2018/19 to be about R10-billion lower than Treasury’s October 2018 estimates.
The primary contributors to this forecast shortfall are poor performances in corporate income tax collections, as well as a deterioration in personal income tax collections in recent months.
“It is possible that the situation could deteriorate further if the slowdown in personal income taxes persists for the remainder of the year and value-added tax (VAT) collections slow down, a distinct possibility given the recent poor trading updates from retailers,” PwC’s report stated.
PwC, however, does not expect measures to be taken in the 2019 Budget to raise significant amounts of additional revenue.
In light of this, PwC said it expects tax revenues to grow in line with GDP growth to about R1.41-trillion, about R22-billion below the MTBPS forecast.
No change is expected in the general corporate tax rate of 28%, as an increase would negatively impact on the competitiveness of South Africa’s tax rate and would not be in line with the objective of promoting economic growth, Mandy added.
Meanwhile, in light of the significant increases in personal income tax in recent years, PwC does not expect significant increases this year, which would likely result in relief for fiscal drag, with the possible exception of higher tax brackets.
Given the public outcry over last year’s VAT increase, as well as the “perceived regressivity of VAT”, PwC forecast that another VAT increase is highly unlikely this year.
However, as an alternative to a higher VAT rate on luxury goods, PwC believes it is possible that the list of goods subject to ad valorem duties could be expanded to cover additional luxury goods.
Fuel levy increases will likely be limited to inflation rates, PwC said, adding that these figures will likely be between 15c/l and 20c/l.
Further, despite the fact that it was expected that the Carbon Tax Bill would be passed by the end of 2018, so that it could be implemented on January 1, 2019, the Bill was yet to be enacted.
Considering that the implementation date will likely be moved to the same date next year, PwC noted that the Carbon Tax would probably not result in any additional revenue in 2019/20.
Given the substantial increases in the 2018 Budget to the plastic bag levy (50%), the environmental levy on incandescent lightbulbs (33%) and the vehicle emissions tax, PwC noted that it did not expect any significant increases to these taxes in this year’s Budget.