Budget preview: Talks of VAT and fuel levy increases, govt wage bill
South Africans are waiting with baited breath to find out where they will need to tighten their belts as government tries to steer clear of fiscal ruin.
Finance Minister Tito Mboweni will table the annual budget in the National Assembly on Wednesday and is expected to outline measures to scale back public spending and raise revenue.
Mboweni's budget speech comes amid growing government debt, a stagnant economy and a record-high unemployment rate.
Chief economist at Econometrix Azar Jammine says Mboweni has a tough juggling act ahead of him.
"The problem minister Mboweni faces is that if he does what the markets want him to do, he's going to illicit a lot of push back from within his own party. Conversely, if he panders to their wishes and doesn't do what the markets would like him to do then he risks exacerbating likelihood of a credit rating downgrade.
"In many ways he's in a lose-lose situation," says Jammine.
Oh dear!! pic.twitter.com/4ipQKD9IqO
— Tito Mboweni (@tito_mboweni) February 26, 2020
Faced with a national debt equivalent to around 60 percent of gross domestic product and a budget deficit of around 5.9 percent of GDP, Mboweni has little room to manoeuvre.
There are talks that the minister is considering hiking value-added tax (VAT) to bring in more revenue for the government but Jammine says a hike in VAT would likely cause social unrest in the country.
"VAT is a fairly reliable source of tax revenue collection. It's difficult for people to escape paying for VAT therefore if the VAT rate were raised by 1% it could easily bring in an extra R23 billion to R24 billion.
"The problem, is that it is vehemently opposed by trade unions who believe that it penalises the poorer sections of society."
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The continent's most industrialised economy has in recent years lurched from one economic woe to the next. Weak growth, deteriorating public finances including a swollen budget deficit, crippling power cuts and soaring unemployment still cloud the outlook. President Cyril Ramaphosa has alluded to the crises, warning during a state of the nation address last week that government debt was "heading towards unsustainable levels".
But Efficient Group economist Franscois Stofberg says he believes Mboweni will take a more indirect approach to tax hikes.
"I think what he's rather going to do is increase the fuel levy which is kind of like an indirect tax. He'll most likely increase the fuel levy by a substantial amount, let's say 80 cents, possibly even R1.”
Government employees and trade unions will also pay particular care to the wage bill.
"We would like to hear how they are going to reduce the size of the government wage bill and other social spending," says Stofberg.
To add to the pressure, rating agency Moody's will also be watching like a hawk. Moody’s is the last international credit ratings agency which is yet to downgrade the country to junk status. The budget will ultimately determine whether South Africa keeps its investment grade rating.