Growing economy will remove pressure of having to raise taxes: Old Mutual

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Although there was not one particular solution to achieving higher economic growth, building confidence and actively engaging the private sector to encourage investments in the economy would help, Le Roux said.

Government had another opportunity - outside of the recent marathon meetings it had been holding with business leaders - to build confidence and help SA avoid a credit ratings downgrade through Finance Minister Pravin Gordhan's budget speech next Wednesday, Le Roux said.

Fiscal tightening

"We expect the minister to tighten fiscal policy sufficiently. So raising taxes and cutting spending where they can," Le Roux said. "Other key issues are state owned enterprises and what happens to the wage bill over time, how are we going to control it over the longer term because it has just been growing too fast."

Because fiscal tightening alone would not prevent a credit rating downgrade, growth-enhancing reforms were required to help prevent the long-term effect of a downgrade, Old Mutual Emerging Markets CEO Ralph Mupita said. A downgrade raises the cost of borrowing.

Growth-enhancing structural reforms which organisations such as the International Monetary Fund (IMF) have proposed for SA include addressing stringent labour laws, ensuring policy certainty, improving the quality of education and developing skills.

Old Mutual Investment Group forecasts the local economy to grow by 0.5% this year, slightly lower than the IMF's projection of 0.7% and the Reserve Bank's 0.9%.

The group also expects two more 25 basis point rate hikes from the Reserve Bank this year, although higher rate increases were possible if inflation accelerated quicker than currently forecast. The Bank has already raised rates this year, by 50 basis points last month.

Source: BDpro