Going into the Budget, we were on the lookout for the impact of a lower GDP growth forecast on tax receipts, the GNU's spending priorities, whether the budget is growth supportive, and the amount of tax increases necessary to contain the impact of higher spending on the budget deficit. Our working assumption was the GNU and National Treasury's commitment to fiscal consolidation.
Our takeaway is that the GNU and National Treasury are toeing the line. The commitment to implement structural reforms is in place, reflected in the composition of spending that sees infrastructure spending grow by nearly 11% p.a. to support higher growth. The fiscal risk premium currently embedded in the 10-year SAGB yield is in line with our fair value of 10.5%, although the trading range has been reduced to 10.2% to 10.6%.
In the absence of meaningful growth acceleration, several technical and administrative issues will increase in importance. These pertain to a spending review and SARS's ability to increase tax collections. Failing this, the tax burden on individuals will continue to be used to ensure fiscal consolidation.
Government ticks the boxes for commitment to fiscal consolidation: There are three measures to rate the National Treasury's performance in achieving fiscal consolidation. These are (1) the primary budget surplus, (2) the peak in the debt-to-GDP ratio, and (3) the composition of spending. The context is sluggish economic growth, a steep yield curve that reflects the fiscal risk premium, and the challenge to stabilising public finances. The fiscal position remains challenging with an elevated bond maturity profile in the next seven years, and ongoing spending and revenue pressures, while waiting for structural reforms to accelerate growth momentum.