South Africa: South African government delivers austere 2015 budget aimed at fiscal consolidation
March 11, 2015
Faced with serious difficulties in financing its spending, South Africa’s government delivered the 2015 budget on 25 February which focuses on fiscal discipline and maintains the government’s commitment to rein in public debt. Finance Minister Nhlanhla Nene’s budget speech followed on the promises the government made in October’s Medium-Term Budget Policy Statement (MTBPS), in which the key priority policies for the next three years were highlighted. The government expects that lower public spending coupled with higher tax revenues will help bring down the budget deficit within the forecast period.
The government announced an income tax increase—the first in 20 years—of 1.0 percentage points for all citizens earning more than ZAR 181,900 per year (USD 15,863). With tax brackets fully adjusted for inflation, the recent rise will bring the highest marginal tax rate to 41%. In addition, starting on 1 April, fuel levies will increase by 80.5 cents per liter and the “sin” taxes on alcohol and tobacco will be hiked at an above-inflation rate. The government acknowledged that these tax increases could no longer be postponed as substantial debt repayments are on the horizon.
In delivering his speech, Nene also introduced several tax measures aimed at promoting energy efficiency and helping Eskom, the state power utility, maintain a stable supply. For years, South Africa’s economy has been negatively affected by energy constraints, a problem blamed on mismanagement and lack of investment in the energy sector. Lately, the situation has worsened as Eskom has been facing financing problems. As a result, the state utility will receive a capital injection of ZAR 23 bn (USD 2.0 bn) in 2015, which is expected to be raised by the sale of non-core government assets. In addition, the government will temporarily hike the electricity levy from 3.5 cents/kWh to 5.5 cents/kWh. The increase will be reversed once the electricity supply shortage is over. The increase in fuel levies, together with other tax proposals, will raise an additional ZAR 16.8 bn (USD 1.43 bn) in government revenues in fiscal year 2015/2016.
As outlined in the MTBPS, the government will reduce its spending by ZAR 25 bn (USD 2.2 bn) over the next two fiscal years, of which ZAR 12 bn (USD 1.0 bn) will be scaled down in FY 2015/2016. While core social programs will be maintained, the government will limit its spending on goods and services and other non-essential expenses.
Nene also pledged to keep public debt below 48% over the next three years. Despite efforts to increase revenues and cut expenditures, the deficit forecast for FY 2015/2016 has been widened to 3.9%, which is above the 3.6% shortfall forecast in the MTBPS. For FY 2016/2017, the government forecasts the deficit to shrink to 2.6% of GDP. Ana Rosenberg, economist at Frontier Strategy Group, suggests that these targets will not be easy to achieve:
“The budget is very conservative and calls for fiscal austerity, such as limiting growth in public sector wages and reducing spending in social services. While the tight budget alleviates worries over reckless spending, there remains a risk of the government being unable to honor its debt, particularly in foreign-denominated currency if the rand remains volatile.“
In addition, JF Ruhashyankiko, economist at Goldman Sachs International, comments that the inability of the government to meet its targets could trigger a credit downgrade:
“Our forecast for a weaker rand (USD/ZAR 12.70 in 12 months) and likely higher interest rates on the back of the forthcoming Fed funds rate hike will likely worsen the debt service payments. Hence, the MTBPS fiscal package could prove insufficient in the current macro environment to achieve the deficit targets. […] This could threaten the credibility of the gradual fiscal consolidation path and raise the risk of a credit downgrade, potentially leading to a loss of investment grade.”
Whether or not the government can meet its targets depends largely on how the domestic economy fares going forward, and the current growth outlook is not all that favorable.
Author: Dirina Mançellari, Senior Economist