Initial impressions
Improvement relative to Treasury’s October 2017 projections
Contractionary budget : (real) revenue growth expected to outstrip expenditure growth
Budget focused on growth-enhancing mechanisms to restore confidence and propel SA’s growth
trajectory to a higher platform over time
Structural revenue proposals positive for revenue base going forward
Meaningful cuts to expenditure (outside of tertiary education allocation) suggest a prudent approach
to fiscal policy
Immediate market effect
Contractionary budget : lower risk of a sovereign rating downgrade is positive for bonds, the currency
and domestically-orientated shares.
1.FTSE/JSE ALSI rose
1%, supported by a rise
in industrial and
financial shares
2.FTSE/ALSI Financials
gained 0.6%, as
downgrade fears lifted,
while a firmer rand saw
an initial weakening in
resources
3.R186 government bond
rallied 9 basis points.
4.The rand strengthened
0.8% against the dollar.
Fiscal slippage arrested
The main budget deficit is expected to narrow from 4.6% of gross domestic product (GDP) (previously
4.7%) in FY2017/18 to 3.7% (previously 3.9%) in FY2020/21
Faster deficit reduction relative to Treasury’s October 2017 projection is largely related to higher
revenue forecasts and cuts to expenditure
Improvement in government’s (gross) debt ratio projection : debt expected to increase to 56% of
GDP in FY2020/21 (previously 59.7%).
Tax burden still rising
SA’s tax burden still rising : new revenue proposals worth R36 billion
Tax-to-GDP ratio set to climb from 25.9% in FY2017/18 to 27.2% in FY2020/21.
Tax proposals
VAT increases from 14% to 15%, effective from 1 April 2018
R6.8 billion from only partial relief for bracket creep : relief aimed at poorer households
A 52c/l increase in the general fuel levy (22c/l), a 30c/l hike in the Road Accident Fund levy and a 6%
to 10% increase in alcohol and tobacco excise duties expected to raise R2.6 billion
Wealth taxes in the form of a higher estate duty tax rate of 25% (from 20%) for estates greater than
R30 million, an increase in the donations tax rate (from 20% to 25%) and an increase in excise duties
on luxury goods (7% to 9%)
R1.9 billion sugar tax has a proposed implementation date of 1 April 2018
Carbon tax to be implemented from 1 January 2019
Medical tax credits adjusted below inflation for the next three years : expected to raise R4.2 billion
for national health insurance.
Risks to revenue collection
Slightly higher tax buoyancy estimates in response to tax increases : likely contingent on improvement
in tax morality
Revenue shortfall for FY2017/18 revised from R50 billion to R48 billion
Structural tax adjustments positive for revenue base in the Medium-term Expenditure Framework
(MTEF),
Overall negative consumer effect
Consumer spending hurt by VAT increase : vulnerable households compensated through positive real
increase in social grants
Number of grant recipients to grow from the current 17.3 million to 18.1 million by FY2020/21
Some relief for lower-income individuals (increase in bottom three tax brackets and rebates)
Wealthy targeted through rise in excise duties on luxury goods and increase in estate duties
Government hinted that headcount reductions and strict adherence to inflation-linked salary increases
are needed to keep compensation within expenditure limits : less support for consumption spend.
Wage and interest bill still sizeable
Treasury’s provision unchanged from October 2017 : average 7.3% nominal increase (1.8% real)
expected in the civil servant wage bill over the MTEF
A public-sector wage agreement, which fails to take account of fiscal constraints would undercut
progress in containing wage costs and remains a risk
Interest bill shifts to being the second-fastest-growing expenditure item at an average of 9.4% in
the MTEF.
Government addressing ailing state-owned enterprises
Treasury’s guarantees to public institutions amount to R466 billion in FY2017/18 (R300.4 billion already
used) : Eskom, independent power producers and the Road Accident Fund account for the majority
Government is developing a framework to reduce new guarantees to state-owned enterprises (SoEs)
Further financial support required : combination of disposing of non-core assets and underutilised
government properties, introducing strategic equity partners or direct capital injections.
Free higher education to be phased in
Additional funding of R57 billion in the medium term
Higher education and training growing at 13.7% y/y on average in the medium term
fastest growing expenditure item
All new first-year students with a family income below R350 000 per year at universities and TVET
(Technical and Vocational Educational and Training) colleges will be funded for the full cost of study
Rating agencies more likely than not to leave SA’s sovereign ratings unchanged
Fiscal slippage arrested and government debt ratio stabilised
Less cloudy political outlook single centre of power (same leader of the ruling party and president of
the state)
Improved growth outlook
Favourable structural reform momentum improved governance at SoEs, investor-friendly mining
sector policies, support to labour-intensive sectors, product market reform (reducing barriers to entry
and encouraging competition), improving management of public infrastructure projects, curbing
corruption through inquiry into state capture, assistance to troubled municipalities, amendments to the
Public Audit Act to reduce wasteful expenditure, increasing number of special economic zones and
greater collaboration between government, business and labour