- The deterioration in the 2018/2019 financial year is due to a fairly realistic assessment of the outstanding VAT refunds. National Treasury is expecting a R20bn increase in refunds this year, of which R11bn will be released immediately to bring down the level of historical unpaid refunds.
- The decline in growth and buoyancy forecasts is more conservative than we – or the market – had expected, particularly in the next three years. They look plausible, but action is required on a number of structural areas to meet those forecasts. This dramatically reduces revenue forecasts in the coming years. If growth realises higher than Treasury forecasts (which is possible if the politicians decide to act), that will see a slight improvement in the current forecasted deficit.
- National Treasury has budgeted for no new revenue or expenditure measures in the 2019 Budget. They have assumed full compensation for bracket creep for personal income tax.
- The expenditure ceiling has not been breached – despite the bailouts for SAA and the Post Office and the wage hikes. There was no increase to the expenditure forecasts to accommodate the higher wage settlement. Government departments will have to reprioritize spending to close the gap. Across the budget, there is a significant reprioritisation of spending. This includes the movement of capital budget from PRASA that has not been spending to SANRAL.
- National Treasury has not budgeted for revenues from spectrum sales. If progress is made on this area, which will also have growth benefits, this would increase revenues in the year it takes place. This could easily reduce the deficits forecast for next year.
- National Treasury is looking to reduce pressure on households and small businesses and they ironically noted that the increase in VAT refunds represents a “stealth” fiscal stimulus, as it will return R20bn extra to businesses in the current year.
- The increase in bond market issuance is more limited than the downgrades to revenue forecasts.
Will Moody’s downgrade?
Following large improvements shown in the February 2018 Budget, Moody’s moved South Africa’s credit rating outlook from negative watch to neutral and retained the investment grade rating on both the local and foreign currency debt. In their update last week, Moody’s was budgeting for a significant deterioration in the budget deficit in the coming years. However, they were still looking for a consolidation in debt-to-GDP at around 55% of GDP. The current projections from National Treasury sees debt peaking at 59.6% of GDP – a fair bit higher. The big question is whether the MTBPS presents a big enough negative event to warrant an inter-meeting move in the outlook. We suspect not, but if action is not taken in the February 2019 Budget, the outlook is likely to move to negative at that point.
Unfortunately, what this MTBPS appears to demonstrate is that this government is unable to make hard decisions, as reflected by the public sector wage increases, and subsequent lack of consolidation. We are also starting to come to terms with the long-term costs of Jacob Zuma’s cadre deployment. SARS being forced to play catch-up with unpaid VAT refunds in this year is but one – there will be similar costs elsewhere in the system.
All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only.