South African Finance Minister Nhlanhla Nene capped government spending and raised income taxes for wealthier individuals, reassuring investors of his commitment to rein in debt.

In his first annual budget speech on Wednesday, Nene, 56, pledged to bring the deficit down to below 3% of gross domestic product in two years’ time after widening the target to 3.9% in the fiscal year that begins April 1. The income tax rate was increased for the first time in 20 years by 1 percentage point for all taxpayers except the lowest earners.

“He has found the balance,” Kevin Lings, an economist at Stanlib Asset Management, said by phone from Johannesburg. “It’s very clear he wants to get the deficit lower. He has shown in the short time he has been there his commitment to do this.”

Weak economic growth has put pressure on the government’s revenue forecasts, prompting Nene to take more direct action to avoid a debt spiral and ward off further credit-rating downgrades. He lowered his GDP growth forecast for this year to 2 percent from 2.5 percent. The economy expanded 1.5 percent last year, the slowest pace since the 2009 recession.

“Growth performance remains weak and substantial repayments of debt are becoming due,” Nene said. “It is now clear that we can no longer postpone consideration of additional revenue measures.”

Nene pledged to keep gross debt levels below 48% of GDP over the next three years to help avoid further credit-rating cuts following two downgrades last year. Standard & Poor’s rates South African debt at one level above junk with a stable outlook.

Bond yields

The budget was “quite a reassuring commitment to fiscal consolidation and bringing the deficit down and reversing the trend of the debt burden,” Konrad Reuss, S&P’s managing director for southern Africa, said by phone from Johannesburg. “We are certainly comfortable” with the rating at current levels, he said.

The rand rose 0.6 percent to 11.3863 against the dollar as of 10:54 a.m. in Johannesburg. The yield on the benchmark bond maturing in December 2026 fell seven basis points to 7.49 percent.

The budget is “a step in the right direction,” Jeffrey Schultz, an economist at BNP Paribas Cadiz Securities, said in an e-mailed note on Wednesday. “We expect this to be viewed favorably by the market and rating agencies.”

Tax rise

The ruling African National Congress had progressively lowered income and corporate tax rates since 1998, four years after coming to power. Nene, who was deputy finance minister for more than five years before being promoted to the top position in May, protected the poor by avoiding raising value-added tax, which hasn’t been adjusted from 14 percent since 1993.

The income tax increase takes the top rate to 41 percent. Wealthy South Africans will also be hit with higher property transfer duties, with the rate on houses worth more than 2.25 million rand ($196,000) climbing to 11 percent from 8 percent.

“The principle of tax is about fairness and fairness has to do with being able to afford,” Nene said at a budget discussion with SABC TV on Thursday in Cape Town. “You don’t tax a person who can not afford.”

All consumers will be affected by an increase in fuel levies, which together with other tax proposals will raise an additional 16.8 billion rand in government revenue.

“When we raise taxes we are not just raising taxes because we are in the mood,” Nene said in an interview in Cape Town. “We need to narrow our deficit. The increase in taxes is moderate enough to strike the right balance between protecting the tax base, but also not starving the economy.”

Article credit: