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While 2018 Budget will weigh on the consumer, some green shoots are appearing for the economy, says Standard Bank

Outlook: SA can avoid a downgrade, but it’s a close call

Johannesburg, 16 February 2018 - This year’s Budget comes amid significant political change, with the prospect of another ratings downgrade still looming over the economy. However, the outlook is not all bad, says Standard Bank economist, Elna Moolman, as a number of positive signs are emerging that could see consumers helping drive economic growth forward.

While the expectation is that wealthier taxpayers and those consuming alcohol, cigarettes and sugar sweetened beverages will be hardest hit, Dr. Moolman says consumers should experience lower inflation this year at an average of 4.4%, from last year’s 5.3%.

“So if wage growth is around 6.5%, it would mean real wage growth of around 2%. This is the key driver of consumer spending growth in the coming year, and in turn we expect the consumer to drive economic growth to a large extent in 2018, despite the tax increases,” she explains.

According to Moolman, it is also possible to avoid a downgrade - for now. This comes as Moody’s rating agency is closely monitoring the political climate as well as the Budget before making further sovereign ratings decisions (S&P and Fitch have a stable outlook on their ratings for South Africa, and is very unlikely to change ratings). “But it is a very close call and will require decisive government action,” says Moolman.

While a VAT rate hike is being widely touted as one of the quickest ways to rake in more revenue for a stretched fiscus, Moolman is not convinced.

“In a low-savings economy, consumption should rather be taxed, but I think a VAT hike is likely to be politically unpalatable ahead of the 2019 national elections in particular. It is difficult to completely avoid a negative impact on the poor, and there is a debate about the degree to which it may be regressive. We suspect adjustments to increase the effective VAT rate are more likely than a general VAT rate increase,” she says.

On the negative side, though, broad-based fiscal drag is becoming a greater concern every year as tax brackets are not adjusted for inflation in the Budget – dragging people earning higher salaries to keep up with inflation into higher tax brackets. Only modest relief for the lowest income groups can be expected this year.

Those who enjoy sugar-sweetened beverages can also expect to pay more to indulge from April as the Bill introducing the sugar tax has been passed and is due for implementation from April 2018.

“This could yield additional tax revenues of around R1-1.5bn,” says Moolman.

On the wealth tax front, estate duties could be increased from the current 20%, lifting it to 30% - alongside a similar increase in donation tax. This would yield an extra R1.5bn of revenues, according to Standard Bank estimates.

Normal sin tax increases on tobacco and alcohol should yield an additional R2.5 billion in revenue.

It is important to place the Budget in context after Finance Minister Malusi Gigaba signalled total revenue increases, including tax hikes and any assets that government can sell, of around R30 billion in the coming fiscal year,

“So while the tax hike portion of the increases will weigh on the consumer, it is important to note that this is not the only area government is looking at. If last year’s tax hikes were estimated to be worth around R28 billion, and we get around R25 billion of hikes this year - with potential asset sales helping get to the R30 billion revenue increase estimate - then it is not more than what consumers faced last year,” concludes Moolman.

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