Budget reaction: good job Pravin, but how are we going to get growth above 5%?

Posted 27 February 2013 Written by Ciaran Ryan

Economists and tax specialists were generous in their praise of finance minister Pravin Gordhan’s 2013 budget delivered yesterday, but the big question remains: how is South Africa going to get its growth rate from 2,5% to above 5%?

In fact, there are more questions than answers, such as:

Why do we still have exchange controls, a relic of apartheid that virtually all growth-oriented countries in the world have abolished?

If the country can achieve growth of just 2,5%, and inflation is cruising along at 5,6%, how can we afford an increase in Budget spending of 8,1%?

There is a clear implication in the Budget that unless South Africa achieves higher growth rates, tax increases are on their way.

The budget will swallow 30,1% of GDP this fiscal year, which is high by any measure. A decade ago the figure was around 22%. By some estimates, the government is consuming 40% of all wealth produced in South Africa. Leon Louw of the Free Market Foundation says this means South Africans work from January 1st to May 20th to pay their taxes to government, and only after that do they get to keep their earnings for themselves.

Stanlib’s chief economist Kevin Lings says the budget needs a more focused growth strategy, and it remains uncertain how this budget will push the country towards the 5%-plus growth rates needed to reverse unemployment. Chris Stewart of Investec Asset Management told Radio 702 that the tepid growth outlook means less revenue for the fiscus. This, and a deteriorating current account – due to investment flight following the Marikana massacre – suggests tough headwinds in the year ahead.

Part of the growth strategy announced in the Budget involves the creation of Special Economic Zones, but Louw believes these are unlikely to succeed unless they adopt the Chinese model of zero taxes, no exchange controls and exemption from labour laws.

The R7 billion in personal tax relief announced by Gordhan – intended to compensate for fiscal drag – will be eaten up by the 23c a litre increase in the fuel levy and the additional 8c earmarked for the Road Accident Fund. This, combined with the 80c a litre under-recovery in the fuel price in February, means fuel prices are destined to shoot up 110c a litre to a record R13,20 in the next two months.

If that hasn’t wiped the smile from your face, then add to this the imminent increase in Eskom electricity tariffs, and there goes the R7 billion tax relief that Gordhan has just announced.

Gareth Brickman, economist with ETM Analytics, says the budget held few surprises, but adds that the fiscal outlook has become more concerning.  “The government is defiantly marching ahead with more spending, and plans for future spending to be consistently growing, despite revising down its own revenue and growth forecasts, which have historically been optimistic in any case. The fact that a greater direct tax burden was not levied is less a function of government’s desire to keep funds in the hands of the private sector than it is a function of the realisation that higher tax rates may greatly constrain employment growth and profitability, leading to unchanged – or falling – tax revenue.”

Brickman adds that South Africa will dig itself about R170 billion deeper into debt over the course of the next 12 months, equivalent to R13,000 for every household in the country. This will invite the scorn of credit ratings agencies and exacerbate the trade and budgetary imbalances, which in turn “pose risks to the rand and the ability of the economy to achieve robust, balanced, employment-creating growth.”


Image Source: http://www.flickr.com/photos/governmentza/8512102999/

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