Budget 2015: higher taxes and cut growth expected

Pressure on state finances compounded by SOE demands.

South Africa’s economy, which has been battered by power outages and strikes, can expect little reprieve when Finance Minister Nhlanhla Nene delivers his first annual budget on Wednesday.

Nene, 56, signaled last year that he will raise taxes and curb growth in state spending to help keep debt under control. Those measures risk derailing a tenuous recovery in consumer demand and worsen the economic outlook as rolling electricity blackouts curb mine and factory output.

“The South African consumer will likely bear the brunt of the revenue-raising measures,” Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy, said in an e- mailed reply to questions. “Higher taxes will crimp growth further.”

Nene is set to lower his 2015 economic growth forecast from 2.5% – which is already just half the rate the government is targeting by 2019 to cut a 24% unemployment rate. The economy expanded 1.5% in 2014, the statistics office said on Tuesday.

With debt levels approaching 48% of gross domestic product, the government has limited scope to increase spending to support the economy without risking further credit-rating downgrades. Standard & Poor’s rates South African debt at one level above junk.

Nene, who was deputy finance minister for more than five years before being promoted to the top post in May, said in his October mid-term budget that taxes will need to increase to raise R27 billion in revenue over the two years through March 2017. He also pledged to reduce spending ceilings by R25 billion over the period.

‘Reasonable’ increases

“We are not expecting the best of good news,” Peggy Drodskie, acting chief executive officer of the South African Chamber of Commerce and Industry, the main business lobby group, said by phone from Johannesburg on Tuesday.

“We are expecting that there will be tax increases,” she said. “We certainly hope that these increases are going to be kept within reasonable bounds.”

The weaker growth outlook may result in Nene widening his budget deficit target for the year beginning April 1 to 3.7% of GDP from 3.6%, according to the median estimate of eight economists surveyed by Bloomberg. The shortfall may reach 3.6% in the year after that, compared with Nene’s October projection of 2.6%, according to the survey.

Eskom shortfall

Pressure on state finances is being compounded by demands from cash-strapped state-owned companies, including power utility Eskom Holdings SOC Ltd., for support to buy and maintain plant and equipment. Eskom faces a funding shortfall of about R225 billion in the five years through March 2018.

President Jacob Zuma pledged in his state-of-the-nation speech on Feb. 12 to give Eskom R23 billion in financial support in the year through March 2016. The government is set to sell non-core assets to fund the bailout.

“The minister got a very messy bed to start with,” George Herman, head of South African investments at Cape Town-based Citadel Wealth Management, said by phone on Feb. 23. “He must deliver something that will satisfy the ratings agencies and the markets and on the other hand he has a very tough political agenda.”

The Congress of South African Trade Unions, the country’s largest labor grouping and an ally of the ruling African National Congress, said Nene must boost spending to help create more jobs and lower poverty and inequality.

“We are following European and IMF austerity policies, which have only plunged Europe deeper into crisis, where we should be following the U.S. stimulus approach which is leading to recovery of their economy,” Cosatu said in an e-mailed statement on Tuesday.

©2015 Bloomberg News

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