South Africa has fallen on tough economic times – and it might get worse

South Africa has fallen on hard times‚ and tough times lie ahead‚ finance minister Nhlanhla Nene’s medium term budget policy statement shows.

The country had dipped into its contingency reserve to pay its civil servants. The contingency reserves have been sharply reduced to pay the civil servants and to address welfare priorities.

This year’s R5 billion contingency reserve was fully absorbed by the wage bill shortfall. Projected reserves of R15 billion and R45 billion for the next two years have now been drastically cut to R2‚5 billion and R9 billion respectively.

Better news is that the budget deficit has stabilised. The consolidated deficit is stable at about 3% of gross domestic product‚ although it is expected to widen somewhat over the next two years.

The main borrowing requirement is expected to shrink from R176‚3 billion this year to R165‚4 billion next year‚ before increasing again.

Following the recession‚ government debt increased from 26 percent of GDP to 47 percent by March this year. It is expected to rise by a further R600 billion over the next three years‚ remaining stable as a share of GDP.

The country is expected to face a R35 billion tax shortfall over the next three years‚ mainly due to the sluggish economy and lower than expected tax revenue collection for the state.

Despite the shortfall‚ treasury officials said no significant tax increases were foreseen for next year. This would depend on economic circumstances.

Speaking in parliament‚ Nene said during tough times like these‚ the country had to put its children‚ its unemployed‚ its landless and its poor first.

The South African economy is now expected to grow by only 1‚5 percent this year and by 1‚7% next year – significantly down on the expectations of 2% this year and 2‚4% next year which Nene predicted in his budget speech in February.

He gave several reasons for the weak economy:

  • Electricity supply constraints;
  • Falling export commodity prices;
  • Lower business confidence levels;
  • Projected investment growth of just 1‚2% this year;
  • The current accounts deficit on the balance of payments is 4‚1% of GDP;
  • Limited growth in employment and
  • Household income constraints are holding back consumption.

There was some good news‚ too:

  • Exports have grown strongly this year and
  • Consumer price inflation has declined‚ although it is expected to rise again.

Regarding tax reform‚ Nene said the Davis tax committee’s recommendations on profit shifting and the misuse of transfer pricing‚ mining taxation‚ small business taxation‚ value added tax and estate duties were being considered.
Further research is currently being done on wealth taxes.

Nene had harsh words about poorly run state entitities and state-owned enterprises amidst news that SAA is looking for another bailout from the taxpayer.

“Financing state-owned companies that are responsible for growth enhancing infrastructiure investment is one thing. Relief for entities that should be self-sustaining or have mismanaged their commercial activities is quite another‚” Nene said.

Nene also reported that belt-tightening and gravy train reducing steps had had an effect:

  • The state spent 3% less on consultants;
  • It spent 6% less on travel and subsistence and
  • It spent 47% less on catering‚ entertainment and events.

The state also has R3‚9 billion more to spend through unspent monies in the previous financial year‚ departmental rollovers from last year and transfers to SETAs and the national skills fund.

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South Africa has fallen on tough economic times – and it might get worse