South Africa's New Budget Aims to Repair Zuma's Economic Damage

02/21/18 10:27 AM EST
By Gabriele Steinhauser 

JOHANNESBURG--South Africa increased value-added tax for the first time in 25 years Wednesday, to help pay for free higher education for poor and middle-class students while also reining in a significant government deficit.

The budget, presented by Finance Minister Malusi Gigaba, was the first test for President Cyril Ramaphosa, who took office last week. Mr. Ramaphosa has promised to shift the fortunes of South Africa's economy after his predecessor, Jacob Zuma, oversaw a sharp increase in unemployment and weak growth. The new spending plan is a careful balancing act between the ruling party's commitment to support South Africa's poor black majority and Mr. Ramaphosa's pledge to preserve the country's credit rating.

In return, students from poor and middle-class families will start receiving full government funding for attending universities or training colleges, a policy that Mr. Gigaba said would cost some 57 billion rand ($4.86 billion) over the next three years.

"This is a tough, but hopeful budget," Mr. Gigaba said.

The tax rises, along with 87 billion rand in spending reductions, will help reduce the deficit to 3.6% of gross domestic product in the 2018/19 fiscal year from a 4.3% forecast for the year ending March 31, Mr. Gigaba said, and will see government debt peak at 56% of GDP in 2022/23. In his midterm budget review in October, Mr. Gigaba had said government debt would push to 61% of GDP by 2022.

The change in the debt forecast could help convince Moody's Investors Service--the only ratings firm that still deems South Africa's bonds as "investment grade"--to forego a downgrade next month. S&P Global Ratings and Fitch Ratings both cut the country's creditworthiness to "junk" last year, following Mr. Zuma's decision to oust Mr. Gigaba's predecessor, Pravin Gordhan.

Many analysts expect that Mr. Gigaba himself may soon be removed as finance minister as Mr. Ramaphosa reshuffles Zuma-appointees in his cabinet. The 46-year-old has been accused by opposition parties and civil-society groups of helping members the controversial Gupta family--close friends of the former president--gain South African citizenship when he was home affairs minister and of appointing executives at state companies that gave the family overly-lucrative contracts when he was minister of public enterprises. Mr. Gibaba has denied wrongdoing.

Yet the budget also points to persistent challenges faced by Africa's most developed economy. Mr. Gigaba said the government now believes the economy grew 1% in 2017, up from its previous 0.7% forecast, and will expand by 1.5% in 2018, 1.8% in 2019 and 2.1% in 2020. That is barely in line with population growth and far short of the 3% expansion for 2018 that Mr. Ramaphosa had envisaged when he campaigned to become leader of the ruling African National Congress last year, and of the 5% growth he had foreseen for the period after 2023.

Write to Gabriele Steinhauser at


(END) Dow Jones Newswires

February 21, 2018 10:27 ET (15:27 GMT)

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