Gordhan’s catch-22: More debt or raised taxes?

With attention firmly fixed on Gordhan after President Jacob Zuma's State of the Nation address on February 14, the minister finds the South African economy in perilous territory.

Still battling to recover from two successive credit rating downgrades following bloody industrial action in the mining sector – initial indications of which project a R2.5-billion burden on the economy – the rand also finds itself in a downward spiral against the US dollar.

The rand weakened to its lowest level against the dollar in almost four years in January after breaking the R9/$ mark – although it has now clawed back some of these losses and finished at R8.85 to the greenback at the close of trade on Friday.

South Africa is also experiencing the effects of a massive budget deficit, up to R69.9-billion in late 2012 from R8.7-billion in 2011 and a far cry from 2008 when the government last posted a surplus.

Along with this, the country is faced with its second highest budget deficit since 1994 – a massive 5.2% for the 2012/13 financial year – while overall government debt is fast approaching 40%.

Depressed trading demand
Adding to South Africa's economic woes is Europe – the country's second biggest trading partner – which caught in the grips of a recession, dictating a depressed demand for South African goods.

It is in this environment that Gordhan faces possibly the toughest challenge since being elected to handle the state's finances in 2009.

"The environment has not improved since the mini-budget in October and it's difficult to paint a bright picture about government revenue at the moment," Jeff Gable, senior economist at ABSA Capital said on Sunday. "The economy is not growing quickly and we're not creating jobs fast enough."

This line of thinking has led to forecasts of tax increases to shore up further revenue for government. Zuma's address also referred to Gordhan commissioning a "study of our current tax policies" to ensure an "appropriate revenue base to support public spending", lending credence to this prediction.

But this would be a short-term solution, according to Gable.

"Tax increases would make a lot of sense in the short term but we're looking at a long-term issue here – the economy needs to grow more," he added.

'Unsustainable reality'
This view was echoed by Mike Schussler of Economist.co.za, who said taxpayers are already far too stretched.

"We have an extremely narrow tax base that we are trying to do a hell of a lot with and we are not succeeding." Schussler added there was an "unsustainable reality", where too few taxpayers were already supplying for too many citizens exempt from tax through miniscule salaries or unemployment.

"South Africans can't continue paying taxes for the masses who are unemployed. Government needs to get those people working," he added.

"If there are no measures in this budget to address these problems, we will be scrambling to plug holes we simply can't fill through tax hikes."

There have also been suggestions Gordhan will move to implement a higher mining royalties regime, which is in line with the decision by the ANC at its Mangaung elective conference that government needed to extract more revenue from the sector.

'No new profits'
This move would be deeply controversial as the mining sector was recently rocked by shaft closures, threatened job cuts and declining profits.

"The government can talk about taxes in the mining sector as much as they want but the reality is there are no new profits to tax," said Peter Major, mining analyst at Cadiz.

"The second biggest joke behind nationalisation is mining taxation. Half of the mining industry is already on the bones of its arse and now you want to milk it some more? It's ludicrous."

Major also argued the only real option left to Gordhan would be to increase the budget deficit in the hopes that economic conditions would improve in the short term.

"In an economy that is struggling to grow, a mixture of revenue generation is needed instead of just pumping up taxes in any sector," he added.

"Everything works when all role players pull in the same direction. But when you don't issue firm signals of where your economy is going, you are doomed. We need that certainty now."


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