Gordhan’s budget predicament

Gordhan’s budget predicament

Feb 22, 2017

Budget Speech 2017 is scheduled for 14:00 today – and it may cost Finance Minister Pravin Gordhan his job.

Finance Minister Pravin Gordhan has to weigh the impact of higher taxes and reduced government spending on growth as he tries to keep the country’s investment-grade credit rating.

Political infighting has stifled efforts to boost confidence in the economy and increase growth and therefore tax revenue. Economic expansion probably decelerated to 0.4% last year, according to the central bank, the slowest rate since a 2009 recession. That’s hindered efforts to rein in the budget deficit and limit government debt.

“The only feasible, sustainable way of working ourselves out of this problem is to grow this economy,” said Ernie Lai King, head of taxation at Hogan Lovells in Johannesburg.

In October, Gordhan said tax-policy measures will raise an extra R43-billion ($3,3-billion) and spending will be reduced by R26bn in the next two years to narrow the budget shortfall.

Gordhan may raise personal-income taxes, following former Finance Minister Nhlanhla Nene’s 1 percentage-point increase in the marginal rate in fiscal 2016, according to Andrew Wellsted, head of tax at Norton Rose Fulbright in South Africa. Raising the 14% value-added tax rate is another option, but may prove difficult to implement after a government-commissioned tax-review committee said an increase would hurt growth and inflation.

A 1 percentage-point increase in VAT could raise a much as R15bn annually in additional income, according to Muziwethu Mathema, an economist at KPMGin Johannesburg. Increases in estate duty and a doubling of capital-gains tax could deliver as much as R5bn in extra revenue and are probable given the tone that President Jacob Zuma adopted in his State of the Nation Address, said George Herman, head of South African portfolios at Citadel Investment Services.

Zuma repeated pledges by the African National Congress to use the state to reduce racial inequality and ease poverty. Together with some of his ministers he has called for more government spending on projects such as nuclear power plants.

In October, the National Treasury predicted the budget deficit in the year through March 2018 would narrow to 3.1% of gross domestic product. The gap is likely to be 3.2% in 2017-18, according to the median of 13 economists’ forecasts compiled by Bloomberg. The fiscal shortfall puts pressure to the government to borrow more, adding to debt levels.

Gross debt as a percentage of GDP exceeded 50% for the first time since 1999 in the second quarter of 2016, central bank data show. S&P Global Ratings sees this ratio reaching 54% of GDP in 2019, it said in December, when it kept the nation’s credit rating at one level above junk.

“He hasn’t been able to control the debt-to GDP-ratio and he would struggle to do that with growth as low as it is,” said Kevin Lings, chief economist at Stanlib Asset Management in Johannesburg.

The International Monetary Fund forecasts GDP expansion at 0.8% in 2017. Gordhan predicted 1.3% in October. Low economic growth rates hurt the country’s fiscal performance and debt stock, according to rating companies.

South Africa must do more than keep its spending under control to prevent being downgraded to junk, Gardner Rusike, an analyst at S&P, said on February 15. Better economic growth is one of the key factors, he said.

Fiscal consolidation isn’t easy and it isn’t popular. It may cost Gordhan his job.

By Arabile Gumede, Bloomberg News for Fin24