Gigaba’s first test: Can he ace the mid-term budget?

Finance Minister Malusi Gigaba is in an unenviable position. In his maiden budget – today’s medium-term budget policy statement – he must confront, among other things, low economic growth, a tax revenue hole big enough to fly a plane through and the budgetary consequences of struggling state-owned enterprises.

These issues are some of the chief threats to government’s commitment to fiscal consolidation – or its drive to reduce the state’s budget deficit and reliance on debt.

Gigaba must also do it at a time of intense political uncertainty, with last week’s Cabinet reshuffle only heightening alarm among already jittery investors, and providing further impetus for another round of credit ratings downgrades.

The medium-term budget, or adjustments budget, is not usually as significant as February’s main budget where announcements such as new tax proposals are made. But since it is Gigaba’s first budget, and considering the backdrop it is being delivered against, it is being closely watched.

Revenue shortfall
Some economists are already predicting that the budget deficit will worsen in the face of poor growth and falling tax revenues.

Lower than hoped for economic growth for this year has meant that the 2017-18 revenue shortfall will be between R40-billion and R50-billion according to Johann Els, Senior Economist at Old Mutual Investment Group.

“While Treasury will likely try to mitigate the impact on the deficit somewhat by also reporting lower spending and utilising the contingency reserve, the budget deficit will probably be close to 4% of GDP versus the 3.1% deficit target envisaged at the time of the February 2017 budget speech,” Els said in a statement.

To prevent another ratings downgrade, credit ratings agencies will want to see plans to reduce the deficit, and not only through extra revenues from existing or new taxes, but through policies to raise economic growth, said Els.

The revenue shortfall presents a “massive” problem for Gigaba, Nazmeera Moola co-head of fixed income at Investec Asset Management said.

The only clear way to plug the gap is through an increase in VAT, but there was “no polticial appetite to raise VAT,” said Moola.

Nevertheless, given the difficulty he is faced with Gigaba could hint at additional revenue sources, according to Craig Pheiffer, the chief investment strategist at Absa Stockbrokers & Portfolio Management, laying the ground for more tax hike announcements in the 2018 main budget,

These could include steps such as zero rating more goods and hiking VAT on luxury items. He could also increase the wealth tax, which was announced in February, seeing those earning more than R1.5-million a year pay 45% in tax he said.

But these steps are “unlikely to fill the revenue void” he noted, so South Africa will have to add to its borrowing. Accounting for what state-owned enterprises owe, Pheiffer calculates that “for every rand of our gross domestic product, we are indebted to the tune of 60c”

State-owned entities
The country’s beleaguered state-owned entities continue to weigh on state finances and their effects on the fiscus could prove particularly accute in this MTBPS.

In the February budget review, the national treasury flagged the “financial condition” of SOEs as a “significant risk over the medium term”. It named South Africa Airways as one of these problem parastatals that was likely to need recapitalisation and during the course of the year, the state has had to inject R5.2-billion to keep the airline afloat.

Since the 2014 MTBPS the state has commited to ensuring that any support provided to a state-owned company will be “budget neutral” – in other words it will not widen the deficit – but it is not clear where this money to prop up SAA will be found. A mooted sale of governments stake in Telkom appears to be off the table, so the MTBPS will have to clearly illustrate where the state will find the resources to pay for SAA’s bailouts.

The politics
Along with numerous economic challenges the political dynamics cannot be ignored, particularly the concerns over the treasury’s role as a bulwark of sensible money management.

In its preview of the upcoming budget, the Democratic Alliance warned of the reported centralisation of decision making in the finance ministry – at the expense of very experienced, senior staff within the department.

Gigaba is reported to have brought in a number of additional staff after his appointment, and there is growing speculation of a widening rift between his office and the department.

The treasury was a success story of the post-democracy ANC government said Moola. A hallmark of the department has been its continuity, she noted, as well the excellence of its staff. The apparent rift between the ministery and the department “undermined the functioning of the institution” she said.

No matter what the budget announcement brings, however, the ANC elective conference is likely to overshadow its outcome. As a number of analysts have noted – markets and investors are likely to remain uneasy until after December.

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