Additional taxes, details of which will be announced in February, will raise an extra R43bn over the next two years, while the government’s expenditure ceiling will be trimmed by R26bn, Finance Minister Pravin Gordhan said in his mid-term budget speech on Wednesday in Cape Town.
He lowered growth forecasts until 2018 and projected wider fiscal deficits.
READ: South Africans to pay more tax next year
“The numbers that we talk about here demonstrate our commitment to fiscal consolidation,” Lungisa Fuzile, the Treasury’s director-general, said in an interview. “Will the ratings agencies buy that? I don’t know. I hope they do. If we act over-zealously, there is a risk that we could end up with a contraction, which gives us lower revenues and we will, in effect, even end up with a wider deficit than we are trying to achieve.”
S&P Global Ratings, Fitch Ratings and Moody’s Investors Service are due to review South Africa’s credit rating in the next two months and have said reviving growth and reining in debt and government spending are key to averting a downgrade.
Gordhan, who has led the nation’s efforts to avoid junk status, has been at loggerheads with President Jacob Zuma over the management of state companies and the national tax agency. The minister has also been charged with fraud for approving the early retirement of a former colleague, adding to political turmoil that’s been highlighted as a rating risk.
The budget was a pragmatic one that should appease S&P for another six months, said Nazmeera Moola, co-head of fixed income at Investec Asset Management in Cape Town.
“Rating agencies care about growth,” she said in an emailed note. “The measured consolidation that Treasury has outlined shows a firm commitment to meeting the fiscal objectives they committed to in February 2016 without killing growth.”
READ: Treasury expects lower current account deficit
The Treasury forecasts a fiscal gap of 3.4% of gross domestic product in the current year, narrowing to 2.7% by March 2019. The February budget targeted a deficit of 3.2% this year, 2.8% in fiscal 2018 and 2.4% the year after that. The growth forecast was trimmed by 0.4 percentage point for each year until 2018, with an expansion of 0.5% projected this year, rising to 2% by 2018.
While South Africa is trying to keep the broad fiscal picture on track through the tax changes and spending cuts, the “poor growth story is really at the heart of the matter,” Ravi Bhatia, a director at S&P, said in an emailed response to questions.
READ: Treasury cuts economic growth estimate to 0.5%
“We are still worried about the growth story and whether the growth trajectory is going to improve,” he said. “On first glance the new figures look plausible.”
Lower growth has weighed on tax revenue, with the Treasury anticipating that it will miss its February collection target by R23bn this year. That’s forced the government to tap its contingency reserves and increase borrowing. Gross and net debt ratios will peak at higher levels and later than previously forecast.
“What we are talking about is surviving the next two years or so, tighten whatever needs to be tightened, do whatever needs to be done,” Gordhan told reporters.
Meanwhile, the government needs to “work like hell to build consensus, to build a common purpose, to get the noise out the system, create the political stability that everybody requires, create the certainty and the confidence in the economy,” he said.
The budget commitments probably won’t be enough to stave off a downgrade and the government needs to do more to ignite growth, said Kevin Lings, chief economist at Stanlib Asset Management Ltd. in Johannesburg.
READ: Investment needed for faster growth
“The path here is very clear,” Lings said. “Without growth we will get more and more fiscal slippage.”
The rand weakened as much as 1.3% to R13.9421/$ and was a R13.8911 at 18:00 in Johannesburg. The yield on the government’s benchmark rand bonds due 2026 rose 9 basis points to 8.88%.
Average inflation will probably be 6.4% this year, and will be within the central bank’s 3% to 6% target band in 2018 and 2019, the Treasury said. Consumer prices rose 6.1% in September.
Gordhan pledged an extra R17.6bn to help poor university students through March 2020 - an allocation that’s unlikely to end a wave of protests that have rocked campuses across the country amid demands that tuition fees be scrapped completely. Police fired rubber bullets, stun grenades and water cannons at a group of protesters who pelted them with bricks and stones outside the parliamentary precinct on Wednesday.
READ: Gordhan warns of low growth trap for SA
The budget update didn’t allocate any new funding for plans to build new nuclear plants or introduce a national health insurance scheme.
“Proposals have been tabled for a substantial expansion of spending commitments, but if implemented simultaneously the costs would be incompatible with fiscal sustainability,” the Treasury said. “The limited space available to increase taxation cannot accommodate all of these aims. For now, however, long-term policy aspirations far exceed available resources. Difficult trade-offs are needed.”
READ: R17bn over 3 years needed to fund higher education - Gordhan
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