“Steady as she goes” appears to be the mantra as South African government releases budget details
Finance Minister Pravin Gordhan clearly did not want to rock the boat in the rather conservative 2012/13 budget he unveiled in parliament last week.
Most South Africans – as well as the business community and financial markets – should be pleased with a budget which takes the National Development Plan as its point of departure, and included tax relief of R7bn for individual tax payers in a challenging economic environment, according to Fin 24.
“South Africa’s economy has continued to grow, but at a slower rate than projected,” Gordhan said, while presenting his tax and spending plan to parliament.
Growth would be modest and the government’s budget deficit would hit 5.2% amid “enormous” challenges facing the country, he said.
“South Africa’s economy must grow faster and more inclusively,” said Gordhan, warning of harsher times ahead if changes are not made.
Gordhan presented his outlook under pressure to provide assurance after credit rating downgrades from all three major agencies in recent months.
After wildcat mining strikes in 2012 put the brakes on the economy, the forecast falls far short of the state’s target of five percent to fight a stubbornly high official joblessness rate of 24.9%.
“South Africa’s economic outlook is improving but it requires that we take a different trajectory to move it forward,” said Gordhan.
Citing the “economic turbulence” of 2012, when wildcat strikes rocked the key mining sector, he said this had led to a revenue shortfall of R16.3 bn ($1.8 bn). To close the gap in tax revenue versus previous estimates, in the short term he announced cuts to planned spending of R10.4 bn ($1.2 bn) over three years.
He also announced an increase in fuel levies as well as taxes on beer, wines, spirits and tobacco, while giving some tax incentives for consumers and youth employment.
A carbon tax will be increased from 2015.
The minister said that a growing economy — and widening tax base — was the best way to address the budget shortfall.
“All of you must pay a little more tax thank you very much,” he said to mixed reactions from lawmakers.
And more tax increases may well be on the way.
Gordhan also has to juggle a hefty social spending bill, which snaps up the biggest share of the Treasury’s purse, and a blueprint of big build projects in infrastructure.
“Given the circumstances that the minister is facing, he has done a good balancing job,” said Iraj Abedian of Pan-African Capital Holdings.
“He has given a very important warning that taxes may go up if economy activity does not go up, which is something very, very likely in the next two years.”
South Africa budget key stats
Budget deficit: The deficit is estimated higher, at 5.2% of gross domestic product (GDP) in 2012/13 (shortfall of R16.3bn). It is budgeted to come down to 4.6% in 2013/14 and 3.1% in 2015/16.
Growth and inflation: Economic growth has been adjusted slightly downward from last year’s budget with estimated figures of 2.7% in 2013, 3.5% in 2014 and 3.8% in 2015.
Consumer inflation is expected to be stable at 5.7% in 2013, slowing to 5.5% in 2015.
Debt and loan service costs: Net loan debt is projected to reach 38.6% in 2013/14, and stabilise at just higher than 40% towards 2016. Debt service costs are expected to stabilise at 2.8% of GDP in 2012/13.
Revenue and spending: Total spending in 2013/14 is seen at R1 149.4bn or 32.6% of GDP, and total revenue at R985.7bn or 28.0% of GDP.
Infrastructure: Government will over the next three years invest R827bn into building new and upgrading existing infrastructure.