Nov 7, 2016 11:05:28 PM

The Medium Term Budget Policy Statement: is there a silver lining?

Topics: Medium Term Budget Policy, Tax hikes, MTBP, economic direction, servicing your bond 0

Last week’s Medium Term Budget Policy Statement (MTBPS) was unsettling news for homeowners struggling to keep up with their bond payments. Concerns are quite rightly on the rise about mooted tax hikes. But the bigger picture may be a little more positive than they seem.

The MTBPS was an important innovation of the democratic era, intended to indicate the country’s economic direction over the coming years – and help businesses and households to plan accordingly. This year’s statement takes place at a very turbulent time: the economy expected to grow at a meagre 0.5% this year, demands on the fiscus are rising and rating agencies are looking at whether we remain investment grade.

The announcement that another R43bn would need to be found through ‘tax measures’ – essentially higher taxes – has received much attention. This will hit South Africa’s already stressed consumers and property buyers hard, particularly those in the lower and middle-income groups.

This will add to the burdens they are experiencing in servicing their bonds – something that a great deal of recent research has noted.

On the other hand, there were indications that Treasury was using its limited room for manoeuvre to at least set a more promising economic course for the country. Ultimately, sustainable relief for consumers, property buyers and the country at large will require getting growth back on track.

Recognition of the need to deal with problems in government’s supply chain, address failing in state-owned enterprises control spending, reduce the budget deficit – ‘measured, balanced fiscal consolidation’ – are to be welcomed as a necessary element of kicking the economy onto a growth trajectory.

In the short term, these measures signal an important commitment to keep South Africa at investment grade in the eyes of the international ratings agencies. The consequences of a fall to ‘junk’ status will likely be painful, probably demanding even higher taxes, along with rising inflation and interest rates. This will impose an untenable burden on many households. It will also mean long-term pain – Rand Merchant Bank estimates that it takes a country around seven and a half years to recover from a downgrade to junk status.

So, while tough times lie ahead, these will hopefully pave the way for our recovery – and a more prosperous future.

Richard Gray
Harcourts Africa Chief Executive Officer