South Africa: 2016 budget aims at faster fiscal consolidation; implementation risks remain amid dim growth outlook
March 18, 2016
Faced with falling revenues, South Africa’s government delivered the 2016 budget on 24 February, which focuses on stricter fiscal measures and aims at avoiding another downgrade to the country’s credit rating. Finance Minister Pravin Gordhan’s speech followed on the premises of the Medium-Term Budget Policy Statement (MTBPS) presented last October, in which the government highlighted key priority policies for the next three years (FY 2016/2017—FY 2018/2019). Given the fragile economic conditions and the urge to put the country’s public debt-to-GDP ratio on a more sustainable path, the budget focuses on both fiscal consolidation measures and on structural reforms.
With the announced measures, the government expects that lower public expenditures coupled with higher tax revenues will help reduce the budget deficit at a faster pace than what was projected in the MTBPS. The fiscal deficit is now projected to shrink to 3.2% this year before falling further to 2.4% at the end of the forecast period. The 2016 budget intends to increase tax revenues by up to ZAR 30 billion by the end of the three-year period. In particular, the fuel levy will increase by 30 cents per liter and other taxes, such as excise duties, capital gains taxes and transfer duties, will also increase. The government left the VAT unchanged due to its negative effect on consumption, which is the driver of South Africa’s economy. On the expenditure side, Gordhan commented that the government is aiming for a total reduction in public spending of up to ZAR 25 billion in the following three years mainly on the back of a reduction in the public wage bill. The government intends to put restrictions on administrative vacancies and cut on budget transfers of public entities.
The measures announced in the budget are expected to help the government keep its spending in check, however, there are implementation risks mainly related to the fact that GDP is growing at a slower pace than what is estimated in the budget. For years, South Africa’s economy has been undermined by energy constraints that are the result of mismanagement and lack of investment in the energy sector. Moreover, the country is highly reliant on commodities and the slump in commodity prices is negatively affecting public finances. As a result, ratings agencies are scrutinizing the government’s movements due to doubts about its commitment to maintain prudent fiscal policy. The country’s credit rating is currently a notch above the sub-investment grade or “junk” status, and the inability to reassure investors about a turnaround of the current situation could result in capital outflows.
Moreover, South Africa’s currency is under escalating pressure not only due to low commodity prices, but also as a result of uncertain political developments in the country. The currency has lost nearly 5.0% of its value against the U.S. dollar since the beginning of the year. While the tight budget might alleviate worries over reckless spending, there remains the possibility of the government not being able to pay back its debt, particularly in foreign-denominated currency amid a depreciating currency and high interest rates. The 2016 budget projects public debt to reach 50.9% of GDP in FY 2017/2018 before moderating slightly to 50.5% in FY 2018/2019.
Author: Dirina Mançellari, Senior Economist