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Thu Jul 24 22:01:52 SAST 2014

Gordhan walks Budget tightrope

TJ STRYDOM | 27 February, 2013 00:06
Pre-Budget Speech Media Briefing
Finance Minister Pravin Gordhan
Image by: SIYABULELA_DUDA

As Finance Minister Pravin Gordhan walks to the podium this afternoon he will no doubt be aware that only once in the past decade has South Africa's economic growth been weaker.

He will present this budget in a tougher environment, and amid greater expectations, than prevailing at the time of his previous three.

The pain in manufacturing and the unrest in mining have held the gross domestic product back, numbers released by Statistics SA yesterday showed.

Economic growth slowed to 2.5% last year, down from 3.5% in 2011.

The slowdown will weigh on Gordhan because there is a long spending wish list from state departments.

Some analysts believe that Gordhan might be forced to raise taxes, particularly for higher-income earners.

When companies make losses, there is less tax for SARS to collect. When more people are unemployed, the pool from which income tax can be harvested gets smaller.

And consumers, already reeling from petrol price increases and more expensive food and electricity, are likely to spend less, which decreases the value-added tax that flows into state coffers.

Gordhan is expected to announce a few changes to the tax system today.

Investec Asset Management's Andre Roux thinks that the minister might have to tweak tax rates.

"He might also have to be a tad cautious in terms of the usual compensation for inflation that he makes to income tax brackets," said Roux - which means taxpayers would see their spending power decline.

Consumer spending has been the engine of growth for several years, but middle-income earners are under pressure.

Fuel prices are due to jump to new highs next month, with petrol increasing by more than 80c a litre and diesel by about 60c a litre, judging by the latest figures from the Central Energy Fund.

The National Energy Regulator is expected to announce this week by how much it will allow Eskom to push up the cost of electricity. It has asked for an increase of 16% a year for the next five years.

The budget deficit will limit the scope for cutting income taxes.

Gordhan announced in his medium-term budget policy statement last year that he expects the deficit to be about 4.8% of GDP.

Conrad Wood, head of fixed-income strategies at Momentum Asset Management, thinks the deficit could be higher because the government spent more on wages than it intended after a public- sector strike last year.

When ratings agency Fitch downgraded South Africa last month, it cited deteriorating growth performance, which it said was likely to affect public finances, and worsen social and political tensions.

Roux thinks Gordhan will have to revise expectations for the performance of the national economy downwards.

The 3.2% foreseen for the coming year "no longer seems plausible", according to Roux.

"We expect he might have to tell the country not to expect GDP growth of more than 2.5%," he said.

Lower growth will also dampen the chances of reining in the budget deficit, unless deep spending cuts are made or taxes are raised.

A deficit of less than 3% is considered prudent and South Africa maintained that level until 2009-2010.

"Personal tax relief is likely to be limited," said Nedbank group economists in their budget preview.

Roux believes there is a slim chance that Gordhan will increase some tax rates: for example, raising the top marginal rate from 40% to 42% to help finance the state's massive infrastructure spending plans.

State-owned enterprises such as Transnet, Sanral and Eskom are due to spend hundreds of billions in the next decade. But the industry says it has not seen the money.

Construction company WBHO said in its financial results this week that there has been "very little government spending to date".

Group Five referred to an "absence of new concessions awards in South Africa".

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Thu Jul 24 22:01:52 SAST 2014 ::