BUDGET 2018 COMMENT: Slow return to path of fiscal consolidation

By Janice Roberts

Minister Malusi Gigaba

By Craig Pheiffer, Chief Investment Strategist; Absa Stockbrokers & Portfolio Management.

 Bonds rallied and the rand strengthened as minister Gigaba announced a return to the path of fiscal consolidation. The budget deficit  of 4.3% of GDP forecast for the 2017/18 fiscal year was left unchanged as expected, but the 3.9%  deficit forecast for the next three years was reduced to 3.6% (2018/19), 3.6% (2019/20), 3.5% (2020/21) respectively .

This modest improvement in the deficit outlook enabled the minister to announce a lower amount of government bond funding and by extension a lower amount of debt servicing costs over the next three years. Where government debt was set to peak at 60% of GDP, the new expectation is that Government debt will reach a peak of 56.2% in 2022/23. Net debt is expected to stabalise at 53.2% of GDP in 2023/24. In the medium term budget policy statement (MTBPS) debt servicing costs were forecast to grow at an annual rate of 11% over the next three years, and this is now being reduced to 9.4%.

While the deficit reductions over the next three years are positive, the estimates fall far short of what the Minister was forecasting at the time of last year’s national budget.


The VAT rate was always going to be the one big lever that the Minister could pull to make a real difference to tax revenue. The increase in the vat rate from 14% to 15% was probably a compromise for a market that was gearing up for a 2% increase in the vat rate. This move together with a lower than inflationary increase in the tax brackets helped the Minister budget for new tax revenue of R36 Billion in the new fiscal year.

There were no real surprises with Sin taxes and environmental taxes such as the plastic bag levy, and these were generally increased at a rate above the inflation rate. Firm dates for the implementation of the sugar tax (1/04/2018) and the carbon tax (01/01/2019) were announced but all of these measures have more of a broader societal benefit than a massive impact on the fiscus.

Other speculated vat increases such as that on fuel did not materialise and the Minister chose to continue to increase the general fuel levy.

One surprise announcement in the budget was the increase in the offshore prudential limit for institutional fund managers and pension funds. The increase for fund managers from 35% to 40% and for pension funds from 25% to 30% will allow investment managers to diversify their portfolios globally to a greater degree.


Together with expenditure reduction of R85 Billion and greater efficiency of Government, the Minister was able to announce  a total of R 57 Billion set aside for fee – free  higher education of the next three years. First year student with a family income of less than R350 000.00 per annum will be fully funded for their studies in 2018, and this will be rolled out to second and third year students over the ensuing years. It was always questionable whether Government could accommodate this unplanned expenditure, but the combination of tax hikes and expenditure reductions have made this a reality. Another positive development is that the contingency reserve has been ratcheted up to R26 Billion over the next three years. The introduction of the tertiary educational expense is the chief reason why the pace of fiscal consolidation is not as fast as it potentially could have been.

The success of the budget will ultimately depend on whether or not the proposed taxes can be received, and whether or not the Government can affect the efficiencies and expenditure cuts that the Minister has tabled. Recent history is against us, but there is a nationwide search in optimism and confidence that is a prerequisite to greater growth rates and social upliftment. Now is the time.


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