Challenges included low growth, high unemployment, extreme inequality and divisions in society.
In order to address the challenges, the finance minister highlighted the need for “bold and constructive leadership in all sectors, a shared vision, a common purpose, and the will to find common ground”.
He stressed that action and not just words was a key ingredient in the task at hand.
The minister called on South Africans to work as a team sharing resources and skills, defending democratic institutions and developing an inclusive local economy.
The budget was premised on the notion of an inclusive social contract containing “an equitable burden of tax and a progressive programme of expenditures”.
The principles of honesty and fairness needed to be embraced by all South Africans in order to overcome the challenges.
“In acting together we can address declining confidence and the retreat of capital, and we can combat emerging patterns of predatory behavior and corruption”.
The finance minister reiterated that Budget 2016 was guided by the National Development Plan.
GLOBAL ECONOMY
The global economy is characterised by a weak growth outlook driven mainly by a sharp slowdown in developing countries.
According to the International Monetary Fund, global growth for 2016 will stand at 3.4%.
Global trade forecasts have also been reduced.
In terms of key developing countries, China’s move towards domestic consumption and less investment has reduced its growth prospects and consequently impaired global growth and commodity prices.
Brazil and Russia are also forecast to remain in recession in 2016. Oil prices have fallen by 50% since December 2014 and are now at levels last seen in 2004.
In sub-Saharan Africa, GDP growth is expected to reach 4% in 2016. However, low commodity prices and higher borrowing costs have reduced growth expectations in recent months and impacted negatively on countries fiscal positions.
Currency depreciation and reduced capital flows are the norm for many developing countries.
LOCAL ECONOMY
GDP growth is forecast to decelerate from 1.3% in 2015 to 0.9% in 2016. It is expected to rise to 1.7% in 2017 and 2.4% in 2018.
The domestic economy is faced with a period of low commodity prices, increased financial market volatility and lower consumer and business confidence.
Concerns over future energy supply also weigh on investment prospects.
The drop in the value of the rand has made capital equipment more expensive and is likely to contribute towards inflationary pressure.
Treasury, however, forecasts that these factors are likely to ease over the medium term.
Stronger growth is likely to be supported by an increase in global trade and investment, greater policy certainty, higher levels of consumer and business confidence and increased energy supply over the medium term.
Investment growth of 0.3% is expected in 2016. Over the short term, government will be the main driver of investment with businesses likely to hold off on investment decisions until conditions improve.
Higher investment levels will rely, to a large extent, on stronger partnerships between government and business.
Job creation remains a critical concern. The unemployment rate stood at 25.5% in the third quarter of 2015.
Household consumption growth is forecast to moderate to 0.7% in 2016 due to higher inflation and weaker employment growth.
Consumption spending by government is also expected to drop as a result of fiscal consolidation and inflation.
The rand has depreciated by 30% against the United States dollar over the past year.
Export growth of 3% is expected for 2016. This is lower than projected in October 2015 due primarily to reduced demand in Africa and China. Import growth is also likely to slow in 2016 due to weak domestic demand and currency depreciation.
Treasury predicts that the current account deficit will continue to narrow but further reduction will require higher domestic savings levels.
Approximately 5 million tons of maize will be imported during 2016 as a consequence of the severe drought.
Inflation is likely to remain above the 6% target band until 2018 due to the weaker exchange rate, oil price rises and higher electricity prices.
Treasury warns that downgrades by rating agencies and a continued decline in confidence could result in higher borrowing costs, more rand depreciation and lower public and private investment. This will have knock-on effects for job prospects and consumption.
FISCAL POLICY
According to treasury, fiscal policy has had to adapt to the deteriorating economic environment characterized by lower GDP growth and revenue projections.
The 2016 Budget proposals strengthen government’s commitment to a “prudent, sustainable fiscal policy trajectory”.
The spending ceiling has been reduced by R25 billion over the medium term as compared to the 2015 Medium Term Budget Policy Statement (MTBPS).
This will be mainly achieved by reducing spending on public sector wages.
New appointments to the civil service will be subject to clear human resource plans aligned with lower budgets.
National debt is projected to stabilise at 46.2% of GDP in 2017/18 and to decline thereafter.
The budget deficit will reduce more rapidly than was announced in the 2015 MTBPS.
It will fall from 3.2% in 2016/17 to 2.8% in 2017/18, and 2.4% the following year.
Tax will increase by R18.1 billion in 2016/17 and by R15 billion in each of the next two years.
R31.8 billion will also be reprioritized over the medium term to meet new spending needs. This will negate the need to increase the total spending envelope.
Money will be directed at higher education and South Africa’s contributions towards the New Development Bank. R3.5 billion will also be added to the contingency reserve in 2016/17 due to heightened macroeconomic risks. Small business development and performance monitoring will also be targeted.
National departments’ budgets relating to non-essential goods and services such as travel will be reduced to accommodate the re-prioritisation of spending.
Budget 2016 also proposes additional fiscal consolidation of R73 billion over the medium term.
Going forward, additional steps may be taken to ensure that government achieves its medium term budget deficit targets.
Spending and tax measures could be altered within existing consolidation parameters. For example, tax increases could be minimized in favour of higher spending reductions or vice versa.
R11.5 billion will also be added to social grant allocations over the medium term.
Contingency measures may be introduced over the medium term if risks such as weaker-than-expected growth, food inflation, higher electricity prices and struggling state-owned enterprises materialize.
Treasury projects a tax revenue shortfall of R4 billion for 2015/16 as compared to 2015 MTBPS projections.
A revenue target of R1 324 billion is set for 2016/17.
Non-interest spending is projected to decline to 26.4% of GDP in 2018/19 from 26.9% in the current fiscal year.
Debt-service costs will increase by R18 billion from 2015/16 to 2017/18.
The public sector will need to borrow R254.6 billion or 6.2% of GDP in 2015/16. This will narrow to 3.9% of GDP in 2018/19.
TAX PROPOSALS
According to treasury, South Africa’s tax system remains resilient in a weak economic environment. Tax revenues continue to grow faster than nominal GDP.
However, tax revenues in 2015/16 are projected to be R11.6 billion below the 2015 Budget forecast. The revised estimate stands at R1.22 billion.
Corporate income tax will be R13 billion lower, VAT R5.7 billion lower and personal income tax R1.9 billion lower.
R9.5 billion will be raised in 2016 through increases in excise duties, the general fuel levy and environmental taxes.
Tax proposals include:
- Personal income tax relief of R5.5 billion.
- Increase in monthly medical tax credit allowances.
- 30 cents per litre increase in the fuel levy.
- Introduction of a tyre levy to finance recycling programmes – effective 1 October 2016.
- Increases in incandescent globe tax from R4 to R6 effective 1 April 2016.
- Increases in the plastic bag levy by 2 cents.
- Increases in motor vehicle emissions tax- R90 to R100 for passenger vehicles and R125 to R140 for double-cabs.
- Introduction of a tax on sugar-sweetened drinks – scheduled for April 2017.
- Increases of between 6 and 8.5% in alcohol and tobacco duties – proposed new rates include R3.31 per litre of fortified wine, R10. 53 per litre of sparkling wine, R5.82 per litre of fortified wine and R13.24 per pack of 20 cigarettes.
- Adjustments to capital gains tax and transfer duty will raise R2 billion – capital gains tax rates for individuals to increase from 13.7% to 16.4% and for companies from 18.6% to 22.4%.
- Increases in transfer duty on property sales above R10 million.
SPENDING PLANS
Consolidated government expenditure for Budget 2016 stands at R1.46 trillion.
Government spending is expected to grow by 7.1% over the medium term rising to R1.69 trillion in 2018/19.
Debt-servicing costs, at R147.7 billion for 2016/17, will remain the fastest growing component of spending increasing at an annual average of 11.4% over the medium term.
Key budget allocations include:
- Health – R168.4 billion allocation in 2016/17.
- R4.5 billion for National Health Insurance pilot districts.
- Social protection – spending to grow from R154.4 billion in 2015/16 to R195 billion by 2018/19.
- R457.5 billion on social grants over the next three years.
- Old –age, disability and care dependency grants to rise by R80 per month in April 2016 and a further R10 in October 2016.
- Child-support grant increases by R20 per month in April 2016.
- Foster care grant to rise by R30 to R890.
- Higher education and training – R64.2 billion in 2015/16 rising to R80.5 billion in 2018/19.
- Basic education – allocation will rise to R265 billion over the medium term.
- Manufacturing development incentives – R10.2 billion.
- Special economic zones programme – R3.4 billion.
- Water resources and bulk infrastructure – increase to R36.4 billion over the medium term.
- South African National Roads Agency – R27.4 billion over the medium term.
- Small business development – R475 million reprioritized to department.
- Human settlements and municipal infrastructure – allocation to grow to R216.2 billion over the medium term.
- Agriculture, rural development and land reform – R29.1 billion in 2018/19.
- Defence, public order and safety – to increase from R171.5 billion in 2015/16 to R203.6 billion in 2018/19.
- General public services – allocations to decrease from R97.5 billion in 2015/16 to R82.6 billion 2018/19.
ON THE HORIZON
Tobacco product taxation will be reviewed in 2016/17- existing and non-traditional tobacco products and alternatives such as e-cigarettes will be under the microscope.
The Draft Carbon Tax Bill, published for comment in November 2015, will be revised taking into account comments received. Further consultation on the bill will then take place.
The 2016 Appropriation Bill will strictly earmark compensation budgets. Any additions or changes on how the money is spent will require legislative approval.
Reforms to the collective bargaining process and remuneration in terms of the public sector wage negotiation process are also on the cards.
The 2016 Division of Revenue Bill proposes changes to disaster-relief grants to provinces and municipalities. Costs of distributing water by provinces and municipalities will now be provided for.
A Public Procurement Bill is also under construction and will be released for comment in the first half of 2016. Inter alia, it will consolidate the legal and regulatory landscape and modernise procurement rules.
A Special Voluntary Disclosure Programme is to be introduced to give non-compliant taxpayers an opportunity to voluntarily disclose offshore assets and income.
Applications for relief under the programme will apply for a limited window period starting on 1 October 2016 and ending on 31 March 2017.
Also see the budget review by the National Treasury