What to expect from November’s Mini Budget speech
21 October 2016
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On mobile, on digital, on demand, this is Old Mutual Live, Money Coach. Hello and welcome, my name is Chris Gibbons. At the end of the month Finance Minister Pravin Gordhan will, hopefully, stand up in parliament and deliver what is formally known as the ‘Medium Term Budget Policy Statement.’ That is something of a mouthful and it is therefore more commonly known as the Mini Budget. Which is slightly misleading given that the real budget takes place every year in February.
What’s this thing all about, whatever we call it and how does it affect us? We’re joined now by Old Mutual Strategist Izak Odendaal. Izak, welcome once again to Old Mutual Live Money Coach. Medium Term Budget Policy Statement or Mini Budget, whatever you call it, what is the fuss about?
Izak Odendaal: Well, the Mini Budget is really just an opportunity for the Finance Minister to update the government spending and tax plans that were announced in February. In February they make their plans based on a three-year view. So they’re trying to say that this is what we’re going to do over the next three years.
This is what we expect the economic growth rate to be, this is what we expect our tax revenues to be. These are our spending plans for this medium term period. Then every October that just gets updated based on new available information.
What to look out for
CG: What should the ordinary South African be listening out for?
IO: This is typically not a time when there are big tax changes or even big policy changes. I think for ordinary South Africans, I mean as you said, the first issue is will Pravin Gordhan be delivering the budget himself? I think that in itself will be quite noteworthy.
Obviously we have a ratings agency reviews, leaning towards the end of the year. So they will be paying close attention and in that sense the outcome of the budget will impact ordinary South Africans. But I think if we take a three-year view, we know that the background here is that the government has been borrowing a lot of money. Because its tax revenues have been below what its spending rate is, over the last couple of years.
The time has now come for that so-called budget deficit to be reduced in order to reduce the amount of borrowing government does and stabilise the government’s debt levels. That implies two things: Number one, that the rate at which government is spending grows, has to slow. So that’s the one thing to look out for.
Then number two, the tax revenue that the government generates has to increase somehow. In a weak economy, as we are currently experiencing, it’s very difficult to increase tax revenues. When you have a strong economy, the tax just flows in through the door by itself.
In a weak economy you have to go out and look for it and I think that’s the risk that there might be. Not necessarily in October, but in February there might actually be an increase in the tax rates. So for instance value added tax going up or personal income tax going up or capital gains tax going up.
CG: And the key to that is whether or not he’s collecting what he set out to collection.
This is a check in on progress
IO: Absolutely. Again, in February they said they would collect X amount for this fiscal year. In October he will have a good idea of how much they have actually collected. In other words, how will the budget deficit look like for the current fiscal year. Not just for year two and three of the planning framework.
CG: This again, I think you’ve made the point, but let’s just be clear, this is not the speech in which the Finance Minister announces the price of booze and smokes is going up.
IO: No, typically those changes are made only once a year and also the fuel levy. Those are typically announced in the February budget and go live in April. So not expecting any changes on that particular front. But potentially some hints towards what we’ll see in February in terms of other changes to tax rates.
CG: All right, as you say, this particular speech is going to be taking place right before the ratings agencies make their decision on whether or not to downgrade South African government debt. So they will be paying close attention, what are they going to be looking out for?
How it could impact our ratings decision
IO: Absolutely. So I think the first thing is, we do expect the government to put forward a credible plan to reduce the budget deficit, even though it’s a difficult environment to try and achieve those plans. So the first area where the ratings agencies can see whether we are performing is the rate at which government spending grows. Government has, as I said, limited control over how much tax revenue it gets. Because that is really a function of how the economy is performing.
But government has a lot of control over its spending, since itself has to sign off all the cheques. Really, I think the ratings agencies will pay close attention on the spending side. That we are sticking to the spending ceiling that Treasury has imposed.
The second thing is the ratings agencies want to see movement in terms of longer term plans that will get the economy growing at a faster rate. They’re looking for the kind of reforms to economic policy that will lift the longer term growth rate. They’re looking at things like what’s happening with the state owned enterprises. What’s happening in the labour markets. What’s happening with mining regulations and so on.
CG: Very clearly there is this added political dimension to the speech this time around.
IO: It’s unusual because it’s the first time when we are uncertain who the actual individual is going to be delivering the speech. That does add an element of uncertainty. However, at this stage the budget document will have been pretty much completed. So irrespective of who that individual is, I think the work will have been done.
I think the budget that has been planned will be in line with what we’ve seen in previous years. You may not know this, but South Africa ranks very highly globally in terms of the transparency of the budget, the budget process and the budget numbers. So there’s very little room for anybody to hide anything because these things are all out in the open.
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. I’m talking to Old Mutual Strategist, Izak Odendall. Izak, final question for you, what are you expecting Finance Minister Gordhan to say?
What are you expecting to hear?
IO: As I mentioned above, I think the one thing we’re looking for is will there be any announcements in terms of getting that economic growth rate. Measures that will really help economy to perform better. So I think that’s quite crucial.
Number two, as I said, you want to look at government spending plans. Are they sticking to that promise of tightening belts, getting spending under control? Extracting savings through this new office of the Chief Procurement Officer, that’s really set out to help government spend its money more wisely? So those are some of the things that we are looking out for closely.
Also then I think the assumptions that this whole thing is based on. So the government makes a whole bunch of forecasts on economic performance, such as economic growth, inflation etc. If those assumptions are credible, then the budget itself is credible. So it’s always important to look at what actually goes into this machine that churns out the budget numbers.
CG: There we’ll leave it. This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons. I’ve been talking to Izak Odendaal of Old Mutual. Izak, thank you for being with me on Old Mutual Live Money Coach.
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