Consumers still under pressure despite tax relief

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“Government is concerned about the level of over-indebtedness of households,” South Africa’s Minister of Finance Pravin Gordhan said during his budget address in parliament.

“Cabinet has therefore approved a number of measures to assist such households to reduce their debt burden, and to stamp out abusive and fraudulent activities of reckless lenders and unscrupulous debt collectors.”

South Africa’s National Treasury has been under significant pressure to raise taxes as a means of curbing consumer and government debt, but such a move could prompt consumers to increase credit lines as opposed to curb spending.

There are however outside pressure to increase taxes, and credit agencies have warned that failure to do so could prompt a credit downgrade for the country.

According to the 2014 budget review, government’s net debt as a share of GDP however continues to grow but is expected to slow at 44.3 percent of GDP between 2016 and 2017.

Despite the expected slow GDP growth, the country’s budget deficit is expected to also narrow to 0.4 percent between 2013 and 2014, from 4.3 percent between 2012 and 2014.

Between 2012 and 2013, net government debt was between 30 and 35 percent of GDP, before climbing up to between 35 and 40 percent in the 2013 and 2014 period.

More money is however currently being spent on servicing debt instead of financing priority projects such as infrastructure. A low collection of tax revenue could also further impair government debt levels.

“The rand has weakened and inflation has picked up. Long-term interest rates have continued to rise moderately, and the Reserve Bank has increased the repo rate by 50 basis points,” Gordhan explained.

“These trends reinforce the need to moderate public expenditure, lower the budget deficit and ensure that public sector debt stabilises relative to GDP.”

Government debt increased from 5.5 billion rand between 2008 and 2009 and is expected to sit at 1.6 trillion rand in the 2014 to 2015 period.

“Many more households have access to affordable credit, which is of great benefit when used productively, but bad when used to fund excessive consumption,” Gordhan explained.