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Minister Gordhan will need to break out his best dance shoes tomorrow because some fancy footwork is definitely required for the budget announcement.
The ratings agencies, two of whom have SA just one notch above junk status and the other just one notch higher and on negative outlook, will be watching very closely. This budget needs to show firm commitment to addressing the issues such as fiscal discipline, deficit reduction and a stable relationship between labour and business.
However, this is no simple matter. Firstly, it begins against a backdrop of questionable support from key senior government officials for the finance minister. Secondly, it requires the adoption and ongoing implementation of unpopular remedial actions. Thirdly, the tools available to bring about these changes are severely limited.
The rating agencies and through them the investors in South Africa Limited, need to see GDP growth. Corporate South Africa remain reticent to invest, as they do not anticipate a consumer recovery anytime in the near future. They also continue to show low confidence in business conditions with corporate cash balances having more than doubled since 2006.
Fiscal policy needs to improve business confidence and investment. This can be achieved by providing an environment of policy certainty, labour stability and tax incentives.
The Presidents statement regarding “radical transformation” of the economy will serve to further weaken business confidence and leave corporate South Africa likely to continue hoarding their cash and deferring capex spend.
What South Africa really needs is an expansionary fiscal policy, which stimulates the manufacturing sector. It needs to provide tax incentives to encourage large capital programmes from the private sector, but at the same time, it needs to raise more tax revenue and reduce government debt.
This is indeed a difficult play for Minister Gordhan. If instead, he decides to tax corporate South Africa further, this is likely to lead to lower investment and ultimately lower tax receipts down the line. Gordhan needs to be brave but is that even possible given his lack of Presidential support?
Where else can he raise taxes? VAT must surely be completely off limits and so the burden is likely to fall on higher income individuals. Tax compliance will be key again and as we know, higher taxes lead to higher compliance costs, often leaving the fiscus no better off than where they started.
Minister Gordhan needs to show the rating agencies that he is prepared to take decisive action against wayward SOE’s. I am sure he is willing but will he survive if he does?
The right actions tomorrow would immediately unlock c.R700 billion in corporate cash savings, not to mention foreign investment.
Dear Mr Gordhan, best of luck for tomorrow. We need a safe and imaginative pair of hands to guide the country through this difficult period.
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