This budget was never going to be easy. Everyone was still really excited about the “New Dawn” that Cyril Ramaphosa promised in SONA – even as they ignored this part of his speech:

“Tough decisions have to be made to close our fiscal gap”

The trouble is that the current (Welfare) State of the Nation cannot be funded by a Hugh Masekela song.

The Budget Expectation

So what are/were we expecting with this budget? (I’m writing this just before the embargo lifts on the budget documents)

1. Everyone was expecting a VAT hike.
2. No one was expecting the tax brackets to be adjusted in line with inflation (for the many-eth year in a row).
3. Higher taxes on the wealthy (higher capital gains inclusions, higher estate duties, higher donations tax).
4. Pravin suggested last year that he would look to remove the zero-rating on fuel.
5. A sugar tax.
6. The abandonment of the medical expense credit (in order to fund the planned National Health Insurance initiative).

People are/were also hoping for some spending cuts.

The Budget Outcome

[Side-bar note: the embargo has been lifted, and I now have the budget speech and the budget data]

Here is what we’re getting:

1. A VAT hike from 14% to 15%.
2. The tax brackets definitely weren’t adjusted in line with inflation.
3. An increase in estate duty from 20% to 25% (now is not a good time to die).
4. An increase in the fuel levy (rather than the removal of the zero-rating of fuel).
5. A sugar tax, in the form of a “health promotion levy”.
6. The medical expense credit has been amended – admittedly in the most bizarre way. Here’s a quote for you: “Government is concerned that some taxpayers may be excessively benefiting from this rebate, specifically in instances where multiple taxpayers contribute toward the medical scheme or expenses of another person (for example, adult children jointly contributing to their elderly mother’s medical scheme). Where taxpayers carry a share of the medical scheme, contribution or medical cost, it is proposed that the medical tax credit should also be apportioned between the various contributors.” What? If only I’d known that I could contribute a bit of money to some medical expenses, and then claim the full amount! Sadly, it seems that this ship has now sailed.

On the spending cut front:

1. Government is going ahead with Jacob Zuma’s parting gift: Free Tertiary Education. At a cost of R67 billion over the next three years (which includes R10 billion that was already allocated for assistance after #feesmustfall).
2. The National Health Insurance scheme is going ahead.
3. Apparently, there are going to be some expenditure cuts amounting to R85.7 billion, split over the next three years. To be clear: that’s not an actual spending cut. Spending will still go up by 7.6% per year for the next three years, after taking that planned ‘saving’ into account.

I’m also not sure where all those SONA plans for the review of the size and structure of government departments went.

And as for State-Owned Enterprises…

We got this:

The 2017 Medium Term Budget Policy Statement warned that the liabilities of several state owned companies were falling due, and without an improvement in cash flows and governance they would be unable to meet these obligations.

State-owned companies are expected to fund their own operations.

As our winning tipster – Luvo Mgxaji – wrote to us, it is not fair for taxpayer money to be used for continual bailouts, caused by operational inefficiency and financial mismanagement. We agree with Luvo, we have limited fiscal room and are loathe to use it to subsidize inefficiency, rather than address social needs and invest to improve our economic competitiveness.

Government recognizes that the business models of some SOCs are unsustainable, and their capital structures too reliant on debt.

To confront these issues, we will assist them to develop and implement robust turnaround plans.

This needs to be part of a holistic reform programme which considers the role we want SOCs to play in our economic development.

Some will require restructuring with equity investment.

In the coming year, government may be required to provide financial support to several SOCs which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections.

I don’t mean to sound scathing, but isn’t this just lip service? “You guys must fund your own operations, and we’re going to help you come up with a plan to do that, but we also need to help you – which may involve a bailout direct capital injections.”

A Word About Tax Buoyancy

“Tax Buoyancy” is an indicator that tells you how fast tax collections are growing relative to economic growth.

Here is the basic rule of interpretation:

Tax Buoyancy Ratio is less than 1	Tax Buoyancy Ratio is equal to 1	Tax Buoyancy Ratio is greater than 1
Tax revenues are growing slower than the economy	Tax revenues are growing at the same rate as the economy	Tax revenues are growing faster than the economy

Just remember that taxes are derivative – in that they are calculated percentages of economic income. The growth in that income is, in general, determined by the growth of the economy.

So you’d expect the long-term trend to be a tax buoyancy ratio of 1 or thereabouts. Historically, South Africa has averaged at a tax buoyancy of around 1.22 – but the last two tax years have seen a serious decline in that number. In the 2016/2017 tax year, tax buoyancy was around 1.01. The revised number for the 2017/2018 tax year is 0.96.

This suggests that the tax base is becoming exhausted.

Here’s what the budget had to say:

In recent years South Africa has experienced a decline in tax buoyancy – the relationship between tax revenue growth and economic growth. A buoyancy of 1 means the pace of revenue growth is matching that of GDP growth. Between 2010/11 and 2015/16, tax revenue grew faster than the economy. Given large tax increases in 2016/17 and 2017/18, this trend was expected to continue, but revenue growth subsequently slowed, effectively matching the pace of economic growth.

The lower estimated buoyancy of 0.96 for 2017/18 partly reflects a shift in dividend withholding tax revenue to the previous year, as some taxpayers aimed to avoid paying the higher rate introduced in the 2017 Budget. Alongside these temporary effects, lower-than-expected nominal imports weighed down import VAT and customs duties, and personal income tax collections fell short of projections.

These factors are not expected to continue in 2018/19. The projected gross tax revenue buoyancy of 1.51 for 2018/19 includes the R36 billion in additional revenue measures, and assumes a decrease in the personal income tax buoyancy from 1.15 to 1.1.

I just question the logic here. Originally, with the tax increases from the last two years, Treasury was expecting higher-than-economic-growth revenue growth. It has missed that twice.

But it continues to hope.

The bottom line

This may be the budget that we expected, but it is not the budget that we needed.

Hoping that “third time’s a charm!” for tax increases to fix everything is not a real plan.

Where were the spending cuts?

And where were the actual policy changes around State-Owned Enterprises?

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.