#Mtbps2017 – not a damp squib

23 October 2017

The Medium-Term Budget Policy Statement (MTBPS) – often referred to as the Mini Budget, much to National Treasury’s chagrin – is generally viewed as a damp squib.

It’s an opportunity to move money that hasn’t been spent in the first six months of the year, and likely won’t be spent in the second half – to areas that need money, and usually makes for dull reading.

This year, however, the October 25 Budget will be a keenly-watched event.

Not only is it relatively-new Finance Minister Malusi Gigaba’s first budget, but there are several pressing issues on the table: there is the current economic situation, the implications of the recent Cabinet reshuffle, the need to address the fact that we spend more money than we have, as well as constantly cash-strapped state-owned enterprises.

We anticipate that gross domestic product (GDP) will not even grow as much as a percent this year, despite the 2.5 percent gain in the economy in the second quarter, which pulled South Africa out of a technical recession. General predictions for full-year GDP growth vary from 0.5 percent to 0.6 percent, which is not enough to create jobs and fill the tax coffers.

In fact, the South African Revenue Service is collecting less than it had anticipated, which means less money to go around.

Because of this, Gigaba is likely to hint at additional revenue sources – which mean another tax hike in one form or another. His options could include a variable value-added tax rate – meaning zero-rating more items, and hiking VAT on luxury goods. He could also increase the wealth tax, which was initially announced in February and results in everyone earning more than R1.5 million a year paying 45 percent of that to the state.

However, these measures are unlikely to fill the revenue void. So, SA Inc. will have to continue borrowing, pushing up our debt. Already, taking into account what state-owned enterprises owe, for every rand of our gross domestic product, we are indebted to the tune of 60c.

This debt burden is so big, that the money we spend just in interest servicing the debt – wasted spend that serves no societal aims – is almost at the same level as the amount we spend each year on welfare grants, and it’s creeping up on what SA Inc. spends on healthcare.

This means less money to spend on social economic upliftment – on projects that create jobs while providing housing, water, sanitation, electricity, education and other infrastructure.

That’s why this budget matters.

Why we should care

Gigaba will tell South Africa what National Treasury’s view on economic growth is, and will also fill us in on our current debt situation. This will set the tone for policy changes in next year February’s budget, which is the one in which taxes are hiked and other major decisions are announced.

That’s why it’s important that we all keep a close eye on this budget. The ratings agencies will also be watching carefully.

South Africa is already rated as sub-investment – or junk – when it comes to credit, and we’ll be lucky to escape another agency downgrade in December.

Odds are, we will be further downgraded. Agencies watch for aspects such as political instability – especially in the run up to elections – growing debt and economic growth. SA Inc. scores negatively in all those boxes.

The only saving grace is that we are exporting more than we import, which means we don’t owe our international trading partners as much as we could. In fact, they owe us.

However, this is a bit of a backhanded bonus, because it also points to subdued economic conditions in which people and businesses are not spending, and – as a result – not contributing to economic growth.

This Budget will shine a light on our economic situation – a light the international community will take note of, because a further downgrade will hit the rand, skewing monthly budgets as several items will become even more expensive.

And that’s why we should care about #MTBPS2017.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.