S.Africa unveils tough budget amid weak outlook

South Africa's Finance Minister scaled back spending plans and warned of significant tax hikes in his annual budget Wednesday, as Africa's largest economy faces weak growth and a swollen budget deficit.

"South Africa’s economy has continued to grow, but at a slower rate than projected," Pravin Gordhan said, while presenting his tax and spending plan to parliament.

Growth would be a modest 2.7 percent and the government's budget deficit would hit 5.2 percent amid "enormous" challenges facing the country, he said.

"South Africa’s economy must grow faster and more inclusively," said Gordhan, warning of harsher times ahead if changes are not made.

"Reduced revenue results in less spending in the years ahead unless the economy grows," he added.

Gordhan presented his outlook under pressure to provide assurance after credit rating downgrades from all three major agencies in recent months.

After wildcat mining strikes last year put the brakes on the economy, the forecast falls far short of the state's target of five percent to fight a stubbornly high official joblessness rate of 24.9 percent.

Wednesday's growth forecast is a downward revision from the government's previous forecast that gross domestic product (GDP) would grow by 3.0 percent this year, while the deficit forecast has increased from 4.8 percent.

"South Africa's economic outlook is improving but it requires that we take a different trajectory to move it forward," said Gordhan.

Citing the "economic turbulence" of last year, when wildcat strikes rocked the key mining sector, he said this had led to a revenue shortfall of 16.3 billion rand($1.8 billion).

The deficit will reach 5.2 percent of GDP in the year ending March and fall to 4.6 percent in 2013/14, he predicted.

"The growth outlook for the next three years has weakened, and government's net debt is now expected to stabilise marginally higher than 40 percent of GDP."

To close the 16.3 billion rand gap in tax revenue versus previous estimates, in the short term he announced cuts to planned spending of 10.4 billion rand ($1.2 billion) over three years.

He also announced an increase in fuel levies as well as taxes on beer, wines, spirits and tobacco, while giving some tax incentives for consumers and youth employment.

A carbon tax will be increased from 2015.

The minister said that a growing economy -- and widening tax base -- was the best way to address the budget shortfall.

"All of you must pay a little more tax thank you very much," he said to mixed reactions from lawmakers.

A tax review announced by President Jacob Zuma earlier this month, which will also assess mining royalties, was mentioned with no further detail.

But more tax increases may well be on the way.

"There will be significant adjustments in revenue, which means that taxes may go up later," he said.

Gordhan also has to juggle a hefty social spending bill, which snaps up the biggest share of the Treasury's purse, and a blueprint of big build projects in infrastructure.

"Given the circumstances that the minister is facing, he has done a good balancing job," said Iraj Abedian of Pan-African Capital Holdings.

"He has given a very important warning that taxes may go up if economy activity does not go up, which is something very, very likely in the next two years."

Education received the largest single allocation of the spending plan.

Trade was a problematic area highlighted, with exports growing by just 1.1 percent in real terms last year against a rise in imports of 7.2 percent.

The current account deficit on the balance of payments was 6.1 percent of GDP -- which meant spending exceeded the value of production and income.

"This is partly a consequence of the disruption of mining sector activity and the structural reduction in mineral exports due to lower demand," he said.