/ 24 February 2016

Gordhan taxes wealthy, cuts jobs to curb 2016 budget

Gordhan Taxes Wealthy, Cuts Jobs To Curb 2016 Budget

Finance Minister Pravin Gordhan stuck to a pledge to bring down the budget deficit, targeting civil-servant jobs and increasing wealth taxes to stave off a credit-rating downgrade to junk.

The fiscal shortfall will narrow to 2.4% of gross domestic product in three years from the current 3.9%, Gordhan said in his budget speech to lawmakers in Cape Town on Wednesday.

Gordhan (66) faced a difficult balancing act in his first budget since being reinstalled to the job in December. He cushioned low-income earners from tax increases while cutting spending targets, providing support to an economy set to grow at the slowest pace since the 2009 recession without increasing the debt burden.

The budget “is focused on fiscal consolidation,” Gordhan said. “We cannot spend money we do not have. We cannot borrow beyond our ability to repay. Until we can ignite growth and generate more revenue, we have to be tough on ourselves.”

The government will miss this year’s tax-revenue target, pushing up the budget shortfall slightly to 3.9% from 3.8%. The deficit will narrow to 3.2% in the fiscal year beginning April 1, better than the 3.5% median estimate of 21 economists surveyed by Bloomberg.

Credit Risk
South Africa is at risk of losing its investment-grade credit-rating status because of slowing growth and rising debt. Standard & Poor’s has a negative outlook on the nation’s sovereign rating of BBB-, which is one level above junk.

Gross debt will rise to more than 50% of GDP for the first time in at least 25 years, according to the Treasury. Debt has almost doubled since President Jacob Zuma came to power in 2009, when the economy was facing recession and market turmoil linked to the global financial crisis.

Gordhan outlined a series of tax measures to help boost revenue, while pledging to curb the civil service by eliminating non-essential jobs. He avoided lifting the value-added tax rate, which economists at BNP Paribas Securities South Africa estimated could raise as much as R15-billion in revenue if it was increased by 1 percentage point from 14%.

Taxes Rise
Increasing taxes on property sales, fuel, alcohol and capital gains will help raise an additional 18.1-billion in revenue in 2016/17, the treasury said. Gordhan  also proposed a tax on sugar-sweetened drinks from April 2017 and said there may be room to increase indirect taxes such as VAT in coming years.

Gordhan is seeking to restore policy credibility after Zuma sent the rand and bonds reeling when he unexpectedly fired Nhlanhla Nene as finance minister in December and replaced him with a little-known lawmaker, David van Rooyen. The market fallout and lobbying by business leaders led Zuma to backtrack on his decision four days later and reappoint Gordhan to a position he had held from 2009 until 2014.

“We are responding to appeals from the business sector for greater certainty in respect of policies that affect investment decisions,” Gordhan said.

While the minister didn’t mention the risk of a credit- rating downgrade in his speech, the national treasury said in the Budget Review that under a best-case scenario, a cut to junk may cause interest rates to spike in the short-term and the rand to weaken further.

“In a less-favorable scenario, it could trigger a sharp reversal of capital flows and precipitate a recession,” which would require severe fiscal austerity measures, it said. – Bloomberg