Minister Nhlanhla Nene, the minister of Finance’s room for manoeuvring in tomorrow’s medium term budget address is extremely limited.
Through all the financial demands on treasury, the minister will have to indicate that the government understands the seriousness of South Africa’s current financial crisis and is prepared to take drastic steps to improve it. It should, amongst others, include the restriction of government spending and resisting unreasonable trade union demands.
Simple math shows that the state’s expenditure is still increasing at a rate far above that of the inflation rate while tax revenues are not keeping up with it. The result is that sovereign debt is busy getting out of hand.
The minister only has one of two choices – he either has to increase taxes or drastically cut state expenditure.
In the current climate where South Africa is maintaining a very low economic growth rate, an increase in taxes will only restrict economic growth further. This will be the wrong choice.
National and foreign observers as well as international credit rating agencies will closely watch to see whether the budget address indicates that government grasps the seriousness of the current situation and is prepared to apply discipline and restrict state expenditure.
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