Regarding today’s Budget Speech, Standard Bank Economist Dr Elna Moolman says improvements in the budget deficit and debt trajectories (from with the Medium-Term Budget Policy Statement forecasts) exceeded our expectations.
These improvements, she says, are caused by a combination of substantial tax hikes, more supportive macroeconomic assumptions and large expenditure cuts (including, unfortunately, bigger cuts to infrastructure spending).
Government’s cost estimates for the free tertiary education (FTE) policy were below our assumptions, while tax hikes were somewhat bigger than expected. Spending cuts, meanwhile, significantly exceeded our expectations.
In line with the increased optimism of recent weeks, Dr Moolman expects bond and currency markets to react positively to the Budget; there is relief to the bond market due to the decline in the borrowing requirement (the amount that needs to be borrowed to fill a budget deficit), while the currency market (the market in which participants from around the globe are able to buy, sell, exchange and speculate on different currencies) may react slightly positively as a further sovereign credit-rating downgrade by Moody’s seems less likely. The immediate impact of the significant fiscal consolidation (a policy aimed at reducing government deficits and debt accumulation) on the equity market is negative, particularly for consumer and construction stocks, although there is less chance of longer-term fiscal risks.
Overall, the budget struck a reasonable balance between fiscal sustainability and economic growth considerations. The main budget deficit (the result of expenditure exceeding revenue) is projected to narrow from 4.6% of GDP in the 2017/2018 financial year (FY17/18) to 3.8% in FY18/19, and 3.7% in FY20/21. The gross borrowing requirement decreases from R246 billion in FY17/18 to R224.2bn in FY18/19, with domestic short-term loans declining materially and domestic long-term loans retreating marginally. The VAT rate increase should have a slight negative impact on our inflation and consumer spending (and in turn, economic growth) forecasts, but this will be brief.
The new revenue forecasts appear reasonable, though subject to moderate downside risk. While they are supported by higher economic growth forecasts, the new and higher tax buoyancy assumptions exceed ours and pose a moderate downside risk to the revenue projections. The corrective fiscal steps taken in this budget exceeded our expectations.
In a nutshell, says Dr Moolman, the key fiscal adjustments are tax hikes worth R36 billion in FY18/19 (which feed through to the outer forecast years; this includes R22.9 billion from a VAT rate hike), and R85 billion of spending cuts (including R39.7 billion cuts to capital transfers) over the medium term, which is counteracted by an additional R57bn allocated to FTE.