Budget 2016: Speak softly and carry a big stick?

Perhaps Minister Gordhan's conservative budget belies the power he is exerting behind the scenes? If he truly has real control over the finances of the country he is carrying a big stick indeed.

Perhaps Minister Gordhan’s conservative budget belies the power he is exerting behind the scenes? If he truly has real control over the finances of the country he is carrying a big stick indeed.

After December’s #Nenegate fiasco, speculation was rife that Minister Gordhan would use the political capital he supposedly acquired (by returning to the office of Finance Minister) to push through significant curbs on government spending.

There were even whispers from some quarters that he would announce privatization of failing State Owned Enterprises (like SAA). But yesterday’s speech was fairly conservative and didn’t include anything particularly revolutionary or dramatic (unless of course you are a sugar addict or you own shares in Illovo).

The possibility exists that we all simply overestimated the power that Gordhan now has over the presidency and South Africa’s bloated bureaucracy. But it is far more likely that he is shepherding that capital for use behind the scenes. He was also likely taking the volatility in both our society and our economy into account (as well as the upcoming election) and looking to calm the waters rather than make a big splash.

We hope that this capital will allow him to halt further erosion of the credibility of the Finance Ministry (and SARS in particular) and take a harder line on government spending. We hope that he now has the clout to enforce the spending cuts the Finance Ministry has routinely promised and stop further irregular spending at SOEs and government departments.

But only time will tell if the words delivered in his speech will finally match the deeds of the government. Every budget speech has, after all, included promises of curtailing wasteful expenditure but billions of Rand were still lost.

Ed: Looks like we were right about those backroom antics! Gordhan reportedly threatened to resign before the speech and still faces an investigation by the hawks.

Let’s now move away from political speculation and onto economic speculation. What aspects of the 2016 budget will have the greatest impact on your property plans. Here’s my pick:

Budget Deficits & Government Debt

The good news is that the deficit is shrinking: currently down to 3.2% from 3.9% last year. The slightly less good news is that government Debt is projected to stabilize at 46% of GDP (well over R2 trillion). Debt at 46% of GDP is relatively low for a sophisticated economy (the US runs near 102% debt and Japan at around 220%) but I feel this projection of a peak in two years is highly optimistic.

The challenges facing the economy are increasing in number and danger and there is no indication that, within two years, the government will become dramatically better at overcoming them. In fact IMF and even our own Finance Ministry have cut growth outlooks for 2016 repeatedly since May 2015, so it is hard to see how Minister Gordhan can project a doubling of growth to 1.9% by the 2017/2018 financial year.

Debt and growth are the two factors the ratings agencies are paying close attention to. We’ve got some good news about a shrinking deficit and slowing growth in debt but we’ll only find out later in the year if those agencies buy into the positive growth projections.

A downgrade therefore remains a very real possibility and the budget did not (nor could it) act as a magic bullet. If downgrades do come the first will likely come in June and will have very serious, though not apocalyptic, repercussions for our banks: no company can have a rating higher than the country it is based in. This means that foreign investment in banks will be negatively impacted which in turn will impact their appetite for home loans and their risk pricing (the interest rates clients can expect to receive).

In the short term a downgrade may actually improve the likelihood of getting a bond at a good price as banks seek to find local sources of funds to replace foreign investment. Don’t get too happy though: the inevitable negative repercussions for wider economy will eclipse this potential bright spot.

No (sort of) tax increase & more tax relief.

Welcome news, at least for low and middle income earners. The tax threshold was raised to R75 000 and R5.5 billion in tax relief. Tax rates may actually decrease slightly for most South African taxpayers (except for the top 8%).

Good news as in light of expected surges in inflation that will eat away at salaries. Many consumers are going to need every cent to get through this year.

Capital Gains

Effective capital gains tax increases to 16.4% for individuals and 22.4% for companies. If you’re looking to sell a property you need to take this into consideration as you’ll likely end up with slightly less in your pocket.

Transfer Duty

Increase in transfer duty on property sales at or above R10 000 001 to 13%. If you’ve been saving up for that Clifton mansion you need to keep in mind the 13% of the value of the property to the tax man. Remember that this tax is over and above the purchase price.

The Transfer Duty Exemption threshold remains R750 000. If you buy a property at or below this price you will pay no Duty and you will only be taxed on the amount above it.

While not the relief some in the property sector were hoping for this will surely help shore up national sales that have begun to slip in the last year.

Conclusions…
The budget, while not giving too much relief, has not added significantly to the challenges the average South African property purchaser or seller will face in the months to come. While a lot of hype surrounded the budget speech the reality is that it is only a means of managing expectations. Now that the pageantry of the speech season is over we should pay close attention to the monthly inflation and quarterly growth figures. Those figures are where we will find some truth as to the state of the nation.

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