Home News S.Africa hikes taxes, scales back spending plans as economy slows

S.Africa hikes taxes, scales back spending plans as economy slows

Published on 25/02/2015

The South African government raised taxes and scaled back spending plans in its annual budget Wednesday as Africa's most developed economy wrestles with stalling growth, rising debt, power blackouts and rampant unemployment.

Projected economic growth for 2015 is just 2.0 percent, down from 2.5 percent forecast in October last year, Finance Minister Nhlanhla Nene told parliament.

Growth in 2014 was 1.5 percent, dragged down by prolonged labour strikes in the key mining sector, prompting Nene to warn recently that the economy was “at a turning point”.

The growth rate is far below the six to seven percent many economists believe South Africa needs to provide jobs for millions in a country where one in four people is unemployed.

The most important challenges facing the economy are unemployment and the security and reliability of the energy supply from the troubled state-owned provider, Eskom, said Nene.

“Electricity constraints hold back growth in manufacturing and mining, and also inhibit investment in housing and raise costs for businesses and households,” Nene said.

The failure to maintain existing power plants and build new ones in time to meet extra demand has led to rolling power blackouts and analysts say it could be years before capacity can fully meet demand.

Eskom will receive a capital injection of 23 billion rand ($2 billion) this year and electricity tariffs will be increased in an effort to stabilise the power utility’s financial position, Nene said.

The cash is expected to be raised through the sale of non-strategic government shareholdings in some state-owned companies.

While shunning the word privatisation, Nene said “private investment and partnerships with state-owned companies are elements of our strategy for strengthening infrastructure investment and improving service delivery”.

The minister provided no details of what state assets might be sold.

– Consumers pay more –

In addition to higher electricity tariffs, consumers will also have to pay more for alcohol, cigarettes and fuel, and personal income taxes are to go up one percent.

Corporate taxes were untouched, and Nene announced a “more generous” tax regime for small businesses.

The tax changes are expected to rake in an extra 17 billion rand in the 2015-16 fiscal year.

But planned increases to state spending are being scaled back by about 25 billion rand over the next two years, reducing the budget deficit to 3.9 percent this year of GDP this year and 2.6 percent in 2016-17, Nene said.

This year’s budget estimates revenue at 1,188.9 billion rand (28.4 percent of GDP) and plans expenditure at 1,351.0 billion rand (32.2 percent of GDP).

The higher taxes and curbs in state spending could crimp growth further, some economists say, but with debt levels running at close to 48 percent of GDP, increases in government spending would risk further credit-rating downgrades.

Standard & Poor’s currently rates South African debt at one level above junk.

Nene said debt was expected to stabilise at less than 45 percent of GDP in three years’ time.

The Congress of South African Trade Unions (Cosatu) — an ally of the ruling African National Conress — had urged Nene to shun what it called “austerity policies” and boost spending to create jobs and alleviate poverty.

Nene conceded that “unemployment remains our single greatest economic and social challenge”, and outlined multi-billion rand programme of incentives aimed at creating jobs.

He pledged “an unrelenting fight against corruption” in government, while also targeting companies involved in “profit shifting and illicit money flows” and tax evasion.

“Amendments will be proposed to improve transfer-pricing documentation and revise the rules for controlled foreign companies and the digital economy,” he said.

The growth figures show that South Africa is a laggard in the sub-Saharan Africa region, which according to the International Monetary Fund likely turned in 4.8 percent growth last year.