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Walking the tightrope: 2014 budget

Friday, 28 February 2014   (0 Comments)
Posted by: Author: Dave Mohr
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Author: Dave Mohr (Old Mutual)

A credible but unexciting budget for an economy stuck in second gear.

Backdrop: The unfriendly climate

In what was the 20th Budget of the democratic era, Finance Minister Pravin Gordhan faced a massive challenge. It was rumoured to have been his last Budget Speech, and it is hard to blame him. The reality is that everybody – taxpayers, citizens, local and global investors, corporates, ratings agencies and fellow Cabinet ministers – all have high expectations of what the Finance Minister should deliver. He cannot please everyone, and that makes him very unpopular at times.

When Trevor Manuel was Finance Minister, a booming economy and increased efficiency in tax collection meant there was scope to expand welfare spending, while cutting corporate and individual tax rates. But now the economy is stuck in second gear.

Five years ago, emerging markets such as South Africa were praised for having smaller deficits and lower debt ratios than the developed economies. This situation has changed. South Africa’s deficit is now comparatively larger as a percentage of gross domestic product (GDP) than the US’s deficit, and the market’s leniency towards emerging economies with deficits has come to an end.

Capital that was once freely available to emerging markets with large external funding needs, such as South Africa, is now scarce. This caused several key emerging markets’ currencies to slump and bond yields to spike. The increase in bond yields over the past year means that any future borrowing, including rolling over existing debt, will be done at higher interest rates. Already, Government expects to spend R121 billion in this fiscal year on servicing debt (compared with R144 billion on social welfare).

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