Public spending and inflation, key factors in new budget for South Africa

February 25
1:06 AM 2016

Government spending, sluggish global economy and inflation are key factors to figure in the new budget for South Africa. Recently re-appointed Finance Minister Pravin Gordhan will present the 2016 budget for South Africa on Wednesday.Currently, the debt component is alarmingly at about 50 percent of GDP. 

President Jacob Zuma has re-appointed Pravin Gordhan. Zuma has sacked Nhlanhla Nene from the responsibility of Finance Minister and replace him with David van Rooyen, who was in that position for three days. Rooyen is now the new Minister for Cooperative Governance and Traditional Affairs. 

eNCA reports that thekey areas that the new Finance Minister would focus on include government's spending, global economic slowdown, sovereign credit downgrading and high inflation. It was noted that South Africa has been suffering from funds crunch for a long time now. Since Zuma assumed office in 2009, the country's debt burden has almost doubled. 

Investors, consumers, businessmen and policy makers are eagerly looking to the balancing act and how Pravin Gordhan will play in framing the budget for South Africa. The debt burden of South Africa was about $26billion in 2007-08. After Jacob Zuma became President in 2009, the debt rose to over $30 billion in the same year. Now, it's hovering at about $48billion, nearing to 50 percent of gross domestic product (GDP).

Bloomberg made five charts showing why South Africa's budget is so crucial. The five charts developed on government's debt, credit rating, tax hike, tax payers and IMF's cut growth forecast. The increasing debt component coupled with sluggish economy is propelling global rating agencies to lower sovereign credit rating.

Standard & Poor's (S&P) has a negative outlook rating BBB- for South Africa. It's lowest investment grade. Moody's Investors Services has given two levels above junk. Fitch Ratings also given similar to S&P rating.

Pravin Gordhan is expected to raise taxes to bridge the gap in budget deficit. The Finance Minister may hike taxes on personal income and fuel. Gordhan may also raise value-added tax (VAT), which is at 14 percent for over two decades. If the government hikes VAT by one percent, it could result in Rand 15 billion ($985 million) additional revenues annually. 

Meanwhile, there are increasing protests against President Zuma in the national. Three organizations have been given permission to demonstrate protests outside the Parliament on budget day. Finance Minister Pravin Gordhan is scheduled to make a budget speech in National Assembly from 14:00 local time (UTC/GMT +2 hours). Communication Workers Union, Western Cape's Government Employees Pension Fund and Equal Education are in the list of approvals for staging protests in front of Parliament, according to News24.

The spreading news about tax proposals has already triggered protests. This apart, Pravin Gordhan is also facing a major challenge in increasing revenues without hurting any section of the society. International Monetary Fund (IMF), World Bank and South African Reserve Bank have lowered economic growth to below one percent for 2016. Gordhan may also lower growth prediction from 1.7 percent in the latest budget.

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