BUGDET 2019: Budget to prioritise political realities over fiscal discipline

Gavin Smith

Gavin Smith, head of Africa at devere Acuma, looks at his expectations of the February Budget Speech to be delivered by the Finance Minister later this month.

“The Budget will prioritise political realities over fiscal discipline. A pickup in economic growth since summer 2018 should have supported tax revenues, but doubts over the growth spurt’s sustainability, and continuing weak tax collection, both persists. Finance Minister Mboweni’s October prediction of a 2018/19 budget deficit of around 4% may be increased,” says Smith.

Given power shortages, the upturn in industrial production seen last year may struggle to continue. The World Bank’s most recent estimate for GDP growth is 1.3% this year, down from a June 2018 estimate of 1.8%. As well as unreliable energy supplies, it cited fiscal consolidation, a slowdown in household credit growth and high unemployment with low productivity growth, as the main reasons for the downgrading of its 2019 GDP growth estimate, he says.

Ahead of a general election in May, further state funding for debt-ridden Eskom is likely in February’s budget even if it fails to agree with the government a credible turn-round plan. The government does not want erratic electricity supplies to worsen further, particularly as voters head to the polls. Political sensitivities are also likely to delay the sale of South African Airways. One hopes that finance minister Tito Mboweni will try to cease the flow of state funds to these leviathans as soon as possible after the elections.

“The much needed reform of state operated enterprises (SOEs) across the economy must be done hand-in-hand with labour market reform, and removing oligopolies in areas such as retail. The government is to be commended for its investigation into state capture under Zuma. Tackling corruption within the SOEs will be key to increasing their productivity and decreasing their dependence on tax payers’ funding,” says Smith.

The country’s twin government budget and current account deficits, together with a weak economy, makes the rand susceptible to weakness. However, market expectations for fewer interest rate hikes from the Fed than previously expected in 2019, has helped support the rand. It reached a low of 15.3 to the dollar on 5th September but currently trades at 13.7 to the dollar.

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