S.Africa's Budget needs to raise revenue to support spending

By Xola Potelwa

JOHANNESBURG, Feb 25 (Reuters) - South Africa's chronic joblessness is eroding the tax base and swelling the number of dependants on state funds, goading the government to increase revenues and economic growth to cut a budget gap.

In his 3-year budget plan on Wednesday, Finance Minister Pravin Gordhan will try to reassure bond investors worried about increased issuance, and also appease key ratings agencies who have downgraded South Africa's credit rating.

Economists say Gordhan is unlikely to announce a much wider deficit than October's 4.5 percent projection for 2012/13. The consensus among 14 economists polled by Reuters is for a slight upward revision to 4.7 percent of GDP.

In his State of the Nation address two weeks ago, President Jacob Zuma said government would focus on creating jobs, and reducing poverty and inequality this year.

Violent labour strife in the mining and farming sectors in the last six months, coupled with public protests against a lack of basic services like water and housing, point to rising tensions as social divides persist nearly 20 years after white minority rule ended.

Gordhan could tweak tax policies to increase revenue, while markets will want to see evidence of a clear plan to induce higher economic growth.


For a graphic on S.Africa's budget and economic projections, click on http://link.reuters.com/nyd36t



The Treasury has seen its tax base shrink as the economy loses jobs while the government's social welfare programme, which gives out grants to 16 million people, has been a drag on state coffers.

"The balancing act is becoming harder to maintain with each budget. We have too few taxpayers supporting too many grant recipients. This is simply unsustainable," Ettiene Retief of accounting group SAIPA said.

With the government struggling to make headway in its job creation targets, Zuma said earlier this month Gordhan would be reviewing tax policies to support public spending.

Mining royalties are likely to be the main focus of the review, and Gordhan may increase personal income taxes and value added tax (VAT), which has been capped at 14 percent for two decades.

But likely resistance from powerful labour union and government ally COSATU, could see Gordhan holding off on raising personal taxes until after national elections due in 2014.

The market also wants clarity from Gordhan on a 3-year old plan in which the government would subsidise wages for new entrants to the job market. COSATU has rejected the plan, saying employers could use it to push out long-serving employees while exploiting new workers.

Given South Africa's history of under spending on infrastructure, investors also want to see concrete spending plans for 845 billion rand ($95 billion)worth of funds put aside last year.

At the same time, Gordhan will want to assure investors that he is committed to prudent spending, following downgrades from Standard & Poor's and Fitch which have left South Africa's sovereign rating just one level above the speculative grade. Moody's rating is two levels above.

While South Africa's debt-to-GDP ratio remains manageable at nearly 40 percent, ratings agencies are looking for the Treasury to reverse the trend of rising public debt.

For a breakdown of the forecasts, click on ($1 = 8.8733 South African rand) (editing by Ron Askew)