The budget speech laid out a thoughtful approach to the reality we find ourselves in following the global financial crisis of 2008 and the deep recession of 2009 which also left its mark on South Africa. Having maintained his spending growth while his tax revenue fell away by R69bn on account of the weaker economy, the Minister showed a budget deficit of 7.3% of GDP over the past year. Over the next three years this deficit will be reduced to 4% of GDP, partially by limiting real spending increases to 2% annually, while the gradually recovering economy will start generating higher tax revenues once again. The Minister revised higher his expected GDP growth, now expecting 2.3% in 2010, 3.2% in 2011 and 3.6% in 2012. Because of high budget deficits for a number of years, the national debt is expected to rise from 23% of GDP to 40% by 2013 and eventually stabilizing by 2015 after which it may resume declining once again. Though the Minister adjusted the tax tables by R5.4bn, providing partial compensation for the ravages of inflation to households, his tax revenues are expected to grow by 12%, much faster than the expected 8% increase in nominal GDP, indicative that some burdens will increase. In the budget R3.6bn was set aside for the new industrial policy set to be unveiled on 18 February, whose centre piece appears to be a resurrection of increased import substitution linked to infrastructure projects. Also importantly, the inflation target for the SARB was left unchanged at 3%-6%, with the SARB policy described as flexible and if necessary deviating to take into account exceptional circumstances. As to coming changes, there seem to be exchange control reforms on the way linked to the prudential approach already in place. An interesting remark was the point that the public sector wage bill has nearly doubled in five years (an annual compound increase of 14%) and that more moderate increases should be expected in years to come. Besides the 25.5 cent/litre increase in the fuel levy, increases in sin taxes and reduced travel allowance benefits, one is left with the impression that next week will see the start of hefty increases in public sector tariffs and charges, starting with electricity but not limited thereto. Thus the Minister may not have raised income, VAT and corporate tax rates, and even given partial inflation adjustment, though clawing back some of this through higher specific taxes, but the real burden increase this year will not come ‘mainly’ through the budget, but via infrastructure charging. Thus households will not escape having their real disposable incomes burdened this year and companies having their costs increased, feeding into inflation and wage demands, with implications for company earnings, employment prospects and interest rates. The Minister may have been accommodative, and the economy in recovery, but for many the times will remain tough, particularly the working and middle classes that form the backbone of our modern economy. As always, great compassion was shown for the poor, in the way the income tax tables were changed, with two million more children this year qualifying for child support, and R7bn allocated extra to municipalities to shield the poor from coming electricity and water tariff increases. All in all, an impressive maiden budget speech in which the Minister had to take into account widely varying interests and views of many groupings in society against a terrible global backdrop, but doing so with great finesse from a position of financial strength. Cees Bruggemans is Chief Economist of First National Bank.