'Budget viewed against downgrade threat'

2012-01-25 11:17

Johannesburg - This year's budget needs to get things right given the threat of credit ratings downgrades hanging over South Africa, Investment Solutions chief strategist Chris Hart said on Wednesday.

“Our budget is going to be one of the more critical budgets since 1994,” Hart told a seminar at the Gordon Institute of Business Science in Johannesburg.

Hart said last year's budget was sold as one of job creation and poverty reduction. However, there was a huge difference between poverty reduction and poverty alleviation, he said.

Poverty alleviation – like welfare and National Health Insurance – shifts resources onto the consumption side of the economy and helps perpetuate the problem of poverty, he said.

Poverty reduction shifts resources onto the production side of the economy and reduces the risk of poverty over time.

“Last year's budget was sold as a poverty reduction budget, but it wasn't anything near that, it was a poverty alleviation budget,” Hart said.

Finance Minister Pravin Gordhan would deliver his next budget to parliament on February 23.

Both Fitch and Moody's ratings agencies have recently downgraded South Africa's economic outlook.

Last year's budget did not result in the creation of a significant number of jobs and the country's official unemployment rate was still around 25%.

Hart said the only way to create jobs on a mass scale was through small businesses, but the government was trying to subsidise small business through debt models, which did not work.

“We only have debt models, this scheme and that, exercises in red tape... the only effective way to capitalise is through household savings, which you can subsidise with debt,” he said.

Instead of encouraging savings, South Africans have to pay tax on interest, capital gains tax and transfer duty on houses, which all discouraged savings.

“At the moment policy is extremely hostile to job creation... the economy is extremely secure for South Africans, if you are in it. And if you are not in the economy, well then you need welfare and that's unfortunate.”

During the era of former president Thabo Mbeki, South Africa created 3 to 4 million net jobs, but now it was not creating any, Hart said.

However, since 2008, under President Jacob Zuma, policies had changed. Hart said South Africa was now experiencing a “pushback from the tax base”.

“(The government wants) more from you for tolls. People are saying hang on, you've taken so much from us, what's the story? You can raise tax rates, but you won't necessarily get in your tax revenues, and this is the point we are getting into,” he said.

The situation in Greece, where citizens refused to pay tax, was forcing governments to face up to reality, he said.

“If you carry on with tax morality where the taxpayer has to be moral, but tax spenders don't, you have a problem that the taxpayer is alienated.... that is the Rubicon we have crossed,” Hart said.