It’s that time of the year – National Budget 2016/17.
Let’s have a look at highlights and think about how that may affect the property market.
In providing the following overview, I wish to thank Moneyweb for excellent coverage of the Budget and its ensuing Press conference.
For sake of brevity, the highlights are:
- Budget deficit is reduced to 3.2% of GDP, down from 3.9% achieved in 2015/16 tax year.
- Government debt to rise by 11% to R2 trillion or 45.7% of GDP. Total debt will stabilise at 46% over the next two tax years.
- Increased Treasury oversight of State-owned enterprises (SOE’s) and the investigation of the sale of minority equity stakes to private investors.
- No increase in personal income tax (of 13.7 million registered taxpayers, fewer than 1 million individuals pay 64% of personal income tax revenue) or VAT.
- Tax relief of R5.5 billion to limit the impact of fiscal drag with the majority of the relief aimed at lower- and medium-income earners.
- Increase in the effective Capital Gains Tax rates for individuals (from 13.7% to 16.4%) and for companies (from 18.6% to 22.4%).
- The fuel levy will increase by 30c/litre.
- Government to implement a new sugar tax from March next year.
- Increase of transfer duties on property sales above R10 million.
- Sin taxes will rise. Duties on malt beer, fortified wine, sparkling wine, spirits, cigarettes, and cigars rise between 6.7% and 8.2%.
Government has committed to the following expenditure cuts:
- Costs of travel, accommodation and conferences for public officials. The target is to save R1.6 billion over the next three years.
- Vehicles for politicians (Cost of new vehicles limited R750 000).
- Government to renegotiate leases of properties.
- Procurement reforms to achieve savings of R25bn per year by 2018/19.
As regards the economy, Finance Minister Gordhan fell short of implying a recession would occur. From 2014/15 onwards the following were his GDP growth and CPI projections:
GDP growth: 1.6% 0.9% 1.2% 1.9% 2.5%
Consumer price inflation (CPI): 5.6% 5.4% 6.6% 6.2% 5.9%.
These targets are crucial for another aspect of government finance, namely the Budget Deficit [how much government needs to borrow], % of Debt to GDP [self-explanatory] and the cost of repaying debt [very self-explanatory]. From 2015/6, the numbers are:
Budget deficit: -3,9% -3,2% -2,8% -2,4%
Debt as percentage of GDP: 44.3% 45.7% 46.2% 46.2%
Debt service costs: R129.1bn R147.7bn R161.9bn R178.6bn.
The final numbers are the quantity and cost of the Public Service this year and next year:
Total public wage bill for national and provincial departments: R479bn R509bn
Number of employees for national and provincial departments: 1,316m 1,321m.
Finance Minister Pravin Gordhan professionally presented a budget that was geared to improve South Africa’s financial position. On the positive side he achieved this by not raising personal income taxes or those of companies. In addition, he avoided raising VAT which was no doubt well received. His willingness to reduce the budget deficit, which fell from 3.9% to 3.2% this year and is expected to decline further to 2.4% over the next two years, is positive. The fact that he did this by decreasing the cost of government goes beyond the token savings of the last few years.
His difficulty was explaining how GDP growth will be enhanced [by the way, this is not only his job] and he certainly did not cut actual government expense. In addition, the recent decline of the Rand has caused our Foreign Currency debt [only some 10% of Total Debt, thank Goodness], to rise by R45bn. A strengthening of the Rand will decrease that so we need that enhancement badly at least to get us back to our pre-December position. GDP growth also needs to accelerate to positively impact on the above numbers.
Continuing to quote Moneyweb’s articles, Gordhan said: “We need to be frank about South Africa’s economic constraints. We have low growth which leads to reduced tax revenue, lower scope to increase expenditure and lower confidence levels,” he said during a media briefing.
He added that government cannot solely be responsible for growing the economy and that the private sector must come to the party. “Both government and business must do what they can to increase growth and to avoid a downgrade.”
Gordhan was critical of the dismal financial performance and low levels of efficiency of many State-owned enterprises (SOE’s), such as SAA and Eskom. Government has already provided support in the form of guarantees, which now total R467 billion or 11.5% of GDP. The technically insolvent SAA is at the top of the agenda and has received bailouts of R14.4 billion.
To analyse the above highlights, we firstly need to ask whether FM Gordhan has the political support to see this budget through. If not, we are in serious trouble and only the government has the ability to ensure this vital ingredient.
On a positive note:
– He presented professionally and was in command
– We have no increases in income tax that could affect affordability
– R5.5bn has been pumped into the Affordable and lower Middle market sectors through income tax cuts
– The cost of buying houses has not changed but for those from R10m upwards
– The fuel levy is not a major issue for affordability
– CGT’s rise should not really impact anyone but the rich
– If he is right, we are not facing recession which many of our well-informed global advisors seem to expect
– The Rand has generally strengthened in recent days, despite the drop because of Brazil’s downgrading two below junk bond status
– And, on the lighter side we will drink less, smoke less and consume less sugar!
It was interesting to note his Inflation forecast. It was way below the number of 6.8% average I quoted for 2016. Should he prove correct, this will alleviate the need to raise interest rates much further. We could probably expect then only another 0.5% being a total of 1% for this year. This reduced increase could be offset by the R5.5bn tax relief provided in the lower income market.
There is much to be grateful for in this Budget when considering the property market.
However, South Africa remains in dire straits and those who poo-poo a Rating downgrade have no idea how much value it will destroy. Every person in this country will feel the pain economically. Minister Gordhan has probably done his best within the constraints of political will, to present the rating Agencies with a reason to not downgrade us. Time will tell.
Yours in Property.