While a modest improvement in company tax receipts is expected in the final months of the financial year, fiscal drag across the spectrum is “markedly negative for the consumer outlook”, says Standard Bank.
Fiscal drag refers to the situation where more taxpayers are pulled into higher tax brackets due to inflation and higher earnings.
“‘Without providing relief by adjusting the tax brackets to accommodate for inflation, government derives more revenue without explicitly raising tax rates,” explains Standard Bank economist Elna Moolman.
While a slight upward adjustment of the tax-free threshold for personal income taxes was announced in Wednesday’s Budget, there was no change in the current personal income tax brackets. As a result ZAR12.8 billion in revenue will be raised.
“There will be significant fiscal drag across the spectrum, which exceeds our expectations and is unambiguously negative for the consumer outlook. This measures around 0.4% of total annual household consumption expenditure,” notes Moolman.
With VAT receipts increasing significantly, the VAT rate of 15% was not adjusted higher this year. However, it was announced that from 1 April 2019, white bread flour, cake flour and sanitary pads will be zero-rated. Payment of overdue VAT refunds has, according to Treasury, also been higher than previously expected.
The revenue shortfall for 2018/19 was slightly bigger than Standard Bank expected at around R15 billion. This was due in part to the higher-than-expected overdue VAT refund payments, with the persisting effect on future revenues counteracted by tax increases – mainly fiscal drag in 2019/20, and unspecified hikes in 2020/21.
“There was more fiscal slippage in Budget 2019 than we expected, with the main budget deficit forecast at 4.7% from 4.4% in the Medium-Term Budget Policy Statement for the 2019/20 financial year and 4.5% (from 4.3%) for 2020/21,” says Moolman.
Larger-than-expected injections into Eskom of ZAR23 billion a year over the medium term was a factor behind this fiscal slippage. The impact was, however, mitigated by underspending of around ZAR50.3 billion elsewhere over the medium term, with compensation budgets cut by R27 billion over the next three years, despite the elevated multi-year wage settlement in 2018, and the goods and services budgets of select entities cut by 1%.
Total infrastructure spending forecasts were trimmed as a result of lower state-owned-entity spending estimates, despite an increase in government infrastructure spending.
“At the end of the day, the fiscal metrics worsened yet again and they were a bit worse than the market generally expected, while the expenditure ceiling has again been breached,” says Moolman.
The Budget also suggests that the Eskom funding support comes with strict conditions attached, including appointment by the Ministers of Finance and Public Enterprises of a Chief Reorganisation Officer with a mandate to deliver the recommendations of the presidential task team and a recommendation of similar interventions for other SOEs that request guarantees for operational expenses.
While Moolman sees the budget as negative from a credit rating perspective, it is unclear at this stage whether the deterioration will be sufficient to tilt the odds towards a downgrade.