By Wendell Roelf
CAPE TOWN (Reuters) -South Africa’s budget may be tweaked further as more talks between political parties will try to overcome differences over a contentious plan to raise value-added tax, the country’s finance minister told Reuters.
Most big parliamentary parties rejected Finance Minister Enoch Godongwana’s revised budget on Wednesday, despite it scaling back the size of the proposed VAT hike from 2 percentage points to 1 point, spread over two years.
Godongwana’s African National Congress needs the support of at least one other big party for the budget to pass, but its main coalition partner, the Democratic Alliance, is dead-set against any tax increases, as are other big parties outside the coalition.
The budget has been the biggest test for the fractious coalition formed last year when the ANC lost its parliamentary majority for the first time since the end of apartheid.
“There will be engagement which may lead to some amendments in the budget. It is the nature of the thing,” Godongwana said in an interview in his parliamentary office late on Wednesday.
He said he was open to hearing proposals from lawmakers on how to change the budget, but they needed to understand the difficult trade-offs involved.
“Where we sit (as government), we say we’ve done our job and then it’s for parliament to make the final call, but if they scrap the VAT which is 14 billion (rand of additional revenue) they must then say from an expenditure side what should be scrapped,” Godongwana said.
He said a suggestion by some politicians that money could be saved by cutting the country’s bloated cabinet would not yield the sort of money the government needs to fund spending on frontline services like health and education.
The budget now before parliament could be the most controversial for years because the government was not likely to try to raise taxes again soon, he added.
Godowngwa said he thought the budget, which sees public debt peaking next fiscal year and the deficit falling gradually over the next three years, would be viewed favourably by ratings agencies but their main fear would be whether it gets through parliament.
“That’s a test we’ve got to pass,” he said.
The government’s struggle to see the budget over the line has unsettled investors and markets, with the rand coming under pressure and its bonds underperforming peers.
James Wilson, EM strategist at ING agreed that passing a budget eventually with some form of revenue-raising measures would be credit positive.
“For now this seems a difficult prospect, and a potential downside tail risk scenario remains of a complete breakdown of the GNU (Government of National Unity coalition) if differences cannot be rectified,” he added.
Investors will be in wait-and-see mode, until the final contours of the budget are clear.
The unresolved question for markets is what form the final budget takes; we expect noise to be manageable, but risks remain of flaring tension,” said Sonja Keller at JPMorgan.
(Reporting by Wendell Roelf; additional reporting by Karin Strohecker; Editing by Alexander Winning and Toby Chopra)
