Picture: THINKSTOCK
Picture: THINKSTOCK

SA’s budget deficit — the difference between government spending and revenue — will close more rapidly than earlier estimated, which could help the country avoid a sovereign credit-rating downgrade.

The closing of the deficit, however, will come at a cost: taxpayers will have to pay more and the government will have to reduce growth in spending, mainly through head count. "Appointments to fill administrative and managerial vacancies will be blocked on government’s payroll system starting in April 2016," the Treasury said.

The budget deficit is forecast to narrow from an estimated 3.9% of gross domestic product (GDP) in the current fiscal year to 3.2% in 2016-17. The shortfall is then seen narrowing further to 2.8% in 2017-18 and to 2.4% in 2018-19.

The narrowing of the budget deficit will also help the government stabilise debt as a percentage of GDP at 46.2% in the year ending March 2018. "Government is committed to meeting these targets and will take additional steps to do so as required," said Treasury director-general Lungisa Fuzile in his opening remarks in the budget review.

The fuel levy, excise taxes and the effective capital gains tax rate will rise from April and will pump an additional R18bn into state coffers in 2016-17 and R15bn in each of the subsequent two years. The capital gains tax rate for individuals was raised from 33.3% to 40%, and for companies and trusts lifted from 66.6% to 80%.

"SA has relatively high inflation and it has long been pointed out to National Treasury that taxing capital gains is akin to taxing inflation. The situation now becomes worse where these gains are taxed at higher effective rates," PwC Tax associate director Greg Tarrant said.

The decision to raise taxes and reduce spending ceilings was taken after "careful consideration" that these would not be too damaging to economic growth, Mr Gordhan said.

Over the next three years, the government will lower the expenditure ceiling, bolster tax revenues, actively manage fiscal risks emanating from state-owned companies and "sharply restrict" the growth of compensation budgets. And if economic growth does not disappoint, there may be no need for more tax hikes, a senior Treasury official said.

Future budgets may alter the mix of revenue and spending without reducing the overall size of the consolidation, the Treasury said. "For example, government could decide to moderate tax increases in favour of stronger spending reductions, or vice versa."

The government has set itself spending ceilings to manage spending and ensure fiscal discipline. Rating agencies have previously welcomed spending ceilings, saying they showed commitment to fiscal consolidation.

The ceiling for the fiscal year beginning in April has been left unchanged, but that for the 2017-18 year has been lowered by R10bn and that for 2018-19 by R15bn through a reduction of compensation budgets and restricting hiring.