Budget Speech Was Not An Easy Task

Johannesburg (I-Newswire) July 8, 2011 - Finance Minister, Pravin Gordhan found himself in a difficult position this week as he presented his first Budget speech in parliament in the most challenging conditions faced since 1994. To find the right balance between all the demands on the fiscus, while keeping a close eye on the macro-economic consequences of fiscal policy, was not an easy task. While the budget is essentially all about numbers, this particular budget was an important statement on the general direction of the economy. Aside from having to deal with severe recessionary effects and a substantial budget deficit, the government is under pressure to deliver the kind of expansionary budget that the ANC's alliance partners have been calling for. But far from being evidence of a leftward lurch, economists expected that there will be moves to adapt to the prevailing economic climate. The bad news is that prevailing economic conditions and pressure on the state coffers may necessitate higher taxes for South Africa’s higher income groups. The main driver for higher taxation is the budget deficit because of declining tax revenue from individuals and companies. Increasing taxation is a global trend as budget deficits have been rising with developed countries now showing budget deficits exceeding 10% of their gross domestic product or GDP. Governments' bail-out strategies in extending rescue packages to struggling economies during the financial crisis make higher taxation inevitable.

The past week has seen speculation that Gordhan may announce measures to weaken the Rand and peg the value of the Rand to help exporters. Many economists, however, did not expect any announcement with regards the Rand particularly because South Africa's reserve levels were too low to make this a viable proposition. Although the Rand's level is causing exporters to suffer, it is good for keeping inflation down and consumer demand up. The fact that the Rand can easily be traded makes it also easier for one to invest offshore. A further relaxation of exchange control measures was not improbable, although such a step would not necessarily be directly related to the Rand's strength. Something would have been said about the inflation target and if a decision to weaken the Rand was to be announced, speculative activity against the currency would increase and the Rand would rapidly weaken. This would put upwards pressure on inflation, which would aggravate the position of the poor at a time when the economic recession has caused about a million job losses, and it could sharply reduce the income of those who still have an income.

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