No cheer likely from Gordhan

There will probably be little good news when Finance Minister Pravin Gordhan presents his medium-term budget policy statement in parliament on Tuesday.

After a difficult first half of the government's fiscal year, analysts expect higher deficits, more borrowing, lower growth forecasts and further references to extra taxes to fund the planned National Health Insurance (NHI).

In February Gordhan raised the expected budget deficit for the 2011-12 fiscal year to 5.3% of GDP from the 4.6% estimated in October last year, while the budget for the 2012-13 fiscal year was raised from 3.9% to 4.8%. This was, however, on a forecast of GDP growth of 3.4% this year and 4.1% next year.

But after the first quarter's revised GDP growth of 4.5%, growth slowed to 1.3% in the second quarter as the global recovery stuttered and fears grew that the European Union and US might fall back into recession.

Last month the Reserve Bank lowered its growth forecast for this year from 3.7% to 3.2% and from 3.9% to 3.6% for next year, saying the risks for the economic growth outlook are on the downside.

Gordhan is expected to cut the treasury's growth forecast for this year by around 0.2 percentage points and the forecast for next year by 0.5 percentage points.

Slower growth means lower tax revenues, as can already be seen in data released by the treasury. Tax revenue for the first five months of the fiscal year was 36.3% of the budgeted income, compared to 38.5% in the same period last year.

This was mainly due to lower VAT receipts in the second half of the year. Lower tax receipts, together with more spending to stimulate the economy, will lead to a higher budget deficit. Investment bank Morgan Stanley expects the deficit to be raised to 5.8% this fiscal year, but said the treasury might raise it to 6.5% or more.

Dawie Roodt, economist at Efficient Group, expects a bigger budget deficit for political reasons as well.

"The ANC conference in Mangaung next year makes life extremely difficult for Gordhan," Roodt said.

"Politicians are typically very expansive before an event like next year's. South Africa already is quite expansive. While Gordhan might not necessarily want to, he probably does not have much of a choice than to be quite accommodative in his fiscal policy. That is the political reality."

A higher budget deficit will increase the country's borrowing requirements and this could be exacerbated by budgeting for the NHI. After the publication of a green paper in August, Gordhan is expected to provide more clarity on the funding and implementation of the NHI.

Annabel Bishop, an economist at Investec, said if details on the NHI are not provided the government is leaving it very late, with the first pilot project stage of the NHI due to be implemented next year. The green paper on the NHI revealed that the plan will cost R125-billion in 2012, R214-billion in 2020 and R255-billion in 2025, if implemented over the planned 14 years.

Bishop added that while South Africa's government finances are still in a better position than those of most developed economies, increased government intervention in the economy such as the NHI requires would probably result in a sharp deterioration in government finances.

Other possible talking points

• WEALTH TAX

Talk of a wealth tax on rich and/or white South Africans has been widespread in the past months and Finance Minister Pravin Gordhan might refer to the subject.

Annabel Bishop, economist at Investec, said people earning more than R1.5-million a year would be better able to stomach a wealth tax, but a wealth tax on people in the R500000 to R1.5-million income bracket will place further strain on household budgets, lower consumer spend and increase unemployment.

• YOUTH SUBSIDY

Gordhan said in the February budget statement that the government will allocate R5-billion over three years from April next year to encourage employers to take a chance on inexperienced workers. The subsidy was opposed by trade unions.

• EXCHANGE CONTROLS

Brigitte Keirby-Smith, a tax director at Ernst&Young, said Gordhan might announce some further relaxation, but said there is not much more to be done to exchange controls, given the loosening of the last years.

• TRANSFER PRICING

Billy Joubert, tax director at Deloitte, said after changes to the transfer pricing legislation for years of assessment starting from this month, a new or revised transfer pricing practice note on section 31 of the Income Tax Act is expected.

Joubert said tax practitioners also await the release of a new practice note on the provision of inbound financial assistance by a foreign firm to a South African-related party.