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Economist bets on tax hikes after election

Cape Town - Finance Minister Pravin Gordhan's medium-term budget was mostly in line with investors' expectations, said Nomura International's emerging markets economist Peter Attard Montalto.

He lists positive points as the reining in of wasteful government executive spending, firm backing for the national development plan (NDP) and expenditure caps. "These were the best we could have hoped for with the economic and political constraints the National Treasury is operating under," said Montalto.

On the other hand, "using up contingency reserves, a big shift up in net debt in the long term, no new specifics or budgeted allocations to support the NDP, no policy reaction to the shifting macro picture to show credible consolidation" were negatives.

Montalto considers National Treasury’s current account deficit, seen at -6.5% this year and narrowing only marginally to -6.1% in 2016, as the stand-out macro forecast. "We see it narrowing to -5.0% by the start 2015 and then remaining pretty flat from there," said Montalto.

"The breakdown of GDP shows a realistic balance of a sluggish recovery in domestic demand versus a lot of the near-term upside in export growth already achieved," said Montalto.

In line with expectations, no major policy changes were announced. "Indeed, that was the problem," said Montalto.

"We are in the situation of every time the deficit shifts out and the debt level increases without policy reaction – save on the efficiency side.

"The strategy is to hang on in there and hope for growth, while boosting the social wage and infrastructure as much as possible within the limited capacity of the state."

Montalto believes tax increases will be on the cards after the 2014 elections, with a rise in VAT also a very real possibility as soon as the NHI framework is in position.

"What should be done differently? We think the National Treasury should take more significant measures to cut wasteful expenditure and farm out infrastructure much more to the private sector," said Montalto.

That is no quick fix, but because of the government's chosen economic model and its political restrictions the mini budget "is really the best we could hope for".

Despite the firm backing stated for the NDP, "the reality is there were no new policies allocated (or) budget money to help them, or any real new NDP-specific policy champion" apart from economic free zones and the youth wage subsidy.

"This shows the very limited room the National Treasury has to act around NDP even with its enthusiasm for the document – not to mention the lack of leadership elsewhere in government on a cohesive strategy around the document," said Montalto.

- Fin24



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