Agbiz comments on Budget Speech 2015

Feb 25, 2015
Agbiz comments on Budget Speech 2015

The 2015 Budget Speech by Finance Minister Nhlanhla Nene was actually very predictable under the current volatile economic circumstances. The slow economic growth projections, large budget deficit and large expenditure expectation were expected. The hike in taxes and cuts in spending were expected. Minister Nene had limited space to maneuver in, especially considering the social and political demands on the government budget. However, he has the last say in the political debate, as government’s actions are dependent on National Treasury’s budget allocation.

The Minister indicated that government expects 2% GDP growth. This figure, even though low, may be an overestimate, since other analysts expect growth to be as low as 1,4%. The energy crisis will have a deeper impact on growth than expected by government. Underperformance by industries is not only due to underinvestment, but mainly due to insufficient energy supply.

As stated above, it was expected that taxes would be hiked and, as expected. Minister Nene announced an increase in personal income tax, the fuel levy, sin taxes and in the electricity levy. Minister Nene expects that the increase in personal tax and fuel levy will amount to an asdditional R16 billion. He announced that debt sustainability is not a problem. Even though this is what is required for ensuring no further downgrades by rating agencies, it might be over optimistic, given the reality of the current economic situation.

In particular, the combined 80,5 cents per liter increase of the fuel levy and the levy for the road accident fund, is highly detrimental to promoting economic growth, which the government depends on for tax income. The economy gained from the lower oil price’s impact. Even expected interest rate hikes were delayed due to the decreasing impact in inflation as a result of the decrease in fuel prices. This levy will have the inverse effect. Even though Agbiz considers an increase in the fuel levy as an option to increase government income, the announced increase is too much and will have an increasing effect on the end price of consumer goods and a negative effect on the competitiveness of the economy as a whole.

The emphasis in the budget on supporting basic education in different ways is definitely welcomed, as this forms the basis of the future economy. However, the social grants systems, which has more unintended consequences than benefits, could also be better spent in the education and health care system, to enable future economic active, rather than social dependent, people. Currently there are R16,4 million people depending on social grants.  Most of these people should have been supported to become economically active in future.

The support for Small and Medium Enterprises (SME’s), especially for doing business with government, is welcomed. This was, however, also stated in previous years’ budget speeches, and the opposite realised though administrative and regulatory burdens inhibiting SME development.  Even though the allocation is welcomed in principle, expected realisation is suspect. The tax relief for small business is welcomed but ease to do business should be addressed in order to cut the indirect cost of doing business.

The increases in sin taxes, aka excise duties on alcohol beverages and tobacco products, will constrain demand for these products, but has very little impact on the industry, as compared to how other issues negatively constrain these industries. Therefore, it is considered acceptable.

The increase in the electricity levy is contributing to the energy problem, as a major constraint to economic growth. The incentives for alternative energy are irrelevant in the immediate current crisis, as this is not immediately available. The intentions are clearly to inhibit energy inefficiencies, but this is adding to the cost of industrial operations and further makes South African industries uncompetitive.

Agbiz considers that the government’s grip on certain State Owned Enterprises (SOE’s) no longer makes economic sense. Minister Nene highlighted the turnaround plan for the Post Office, the bailing out of South African Airways and the financial burden of keeping Eskom operational. Even though it is considered essential with the background of the key role these SOE’s play in the economy, Agbiz considers these enterprises to be highly inefficient and the state’s role therein is causing great inefficiencies.

Agbiz welcomes the identified priority on agriculture. However, it was vague on what is meant by its support of agriculture. The revitalisation of the Land Bank is definitely a good step forward for the agricultural economy. However, the impact of other aspects announced in the budget speech, such as the review (and possible drop) in the diesel rebate, the increase in fuel levy, increase in electricity prices and the inefficiencies of SOE’s will have a bigger negative effect on agriculture.

Agbiz is also concerned about certain issues which were mentioned casually, without putting light on the detail. The reality is that the budget suggests that government expenditure will increase above inflation.  Min Nene also did not provide clarity to issues such as allocation on Land Reform and the Agriparks, which President Zuma mentioned in the State of the Nation Address.

In summary, Agbiz applauds Minster Nene for bringing a positive perspective to the national state. He is very encouraging on the intentions of stable financial management in the government operations and the renewed fight against crime and corruption. Agbiz welcomes the support the budget has highlighted for the implementation of the National Development Plan. However, Agbiz considered Minister Nene to be over optimistic on the ability to achieve the growth expected from such a constrained economy. The attempt to balance the income versus the expenditure is good, but the roll out at ground level and the inefficient use of scarce resources remains a major concern.

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