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Economy
Tuesday, December 1, 2015 - 08:06
Prepare for a tough 2016!

“This year’s medium term budget was a reality check for South Africa,” notes Tendani Mantshimuli, Economist: Liberty. The October budget is normally largely ignored by the public as no major announcements are made. This year, however, the student protests dominated the headlines for weeks afterwards, highlighting the plight of South Africa’s youth which face the stark reality of a 50% unemployment rate.
“Unfortunately, inside parliament the news was no better. The message was clear: the economy is in trouble and government is running out of money and options. This does not bode well for consumers who will be facing a bleak 2016,” she says.
Less job opportunities, slower wage increases
South Africa’s growth rate is continuously rated downwards with every budget speech. We are now expected to grow at only 1.5% this year and 1.7% next year. That is simply not enough to create new jobs. Individuals in sectors facing retrenchment have little prospect of finding new employment.
The government sector, which employs over 1 million people and has been a major employer over the last two decades, will not be coming to the party to support job creation. A head count freeze has been implemented to try and manage a ballooning public sector wage bill and those employees who leave will not be replaced.
Tax increases
Mantshimuli  says government debt is expected to reach 50% of GDP by 2018 - clocking in at a massive R2.4 trillion. That equates to about R48 000 per South African. Government is not going to be able to borrow more money to spend on propping up the economy.
While government has started cutting unnecessary expenses (according to Minister Nene catering and entertainment spending has been decreased by 47%) it is going to have to find some way to make up the estimated R35bn tax revenue shortfall over the next three years.
This makes it very likely we will see an increase in some taxes next year. In the budget address the Minister focused on value-added tax and mentioned a possible wealth tax. Although he was clear that no decisions had been made, the message was clear that tax revenue has to rise.
A one percentage point in VAT to 15% would generate an extra R20bn a year in revenue. The question is whether or not the government has the political will to implement a tax so unpopular with unions.
Higher inflation
“Whilst inflation has been well contained this year averaging 4.7%, this is expected to move higher in early 2016,” says Mantshimuli. “Food and petrol prices will continue to rise as the weaker rand makes our food and oil imports more expensive. A higher inflation rate coupled with expectations of interest rate increases in the US will see our interest rise further as already seen with the decision to increase the repo rate by 25 basis points in November.”
With the festive season upon us, use your bonus wisely and do not take on more debt to fund December spending.

Copyright © Insurance Times and Investments® Vol:28.12 1st December, 2015
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