Gordhan's mid-term budget speech fulfils prophecies
Finance Minister Pravin Gordhan's medium-term budget policy speech delivered in Parliament on Wednesday was the fulfilment of a general prophecy: he kept the rhetoric upbeat and the purse strings tight. This is the last medium-term budget speech to be heard before the 2014 elections.
Gordhan trod a thin line between maintaining a necessary leanness in spending, while simultaneously carrying forward his mandate to stimulate growth in the economy. The result was that no major changes in spending were announced, undertakings were made to drive costs down, and commitments to the National Development Plan (NDP) were reinforced.
The national treasury, in its medium-term budget policy framework, acknowledged that the economic and fiscal outlook had "weakened in recent months".
Gordhan echoed this. "Growth is too slow. Unemployment is high and many households are over-indebted. Government expenditure substantially exceeds our revenue. Our level of savings is too low to finance the investment we need. We import considerably more than we export," he said.
The policy framework outlined some of the current South African economic woes. South Africa's economic growth forecast estimates having been revised down from 3.5% in 2012 to 2.1% in 2013; commodity export prices (which supported high revenue growth over the past decade) having decreased over the first nine months of 2013; the rising cost of bond yields, partly due to the recent talk of tapering in the US and increased reliance on foreign investors to finance the budget deficit.
South Africa's recent credit rating downgrade to BBB by Standard & Poor's and Fitch (Moody's also doled out a downgrade to Baa1) was cognisant of the country's increased susceptibilities.
The tone of the medium-term budget showed the treasury's mindfulness of the rating agencies' concern that South Africa's underlying social tensions had the potential to "increase government spending pressure and reduce its fiscal flexibility".
'Reinforcing the fiscal stance'
Treasury's solution was to "reinforce the fiscal stance", which takes into account the country's "greater vulnerability to economic shocks".
The fiscal stance "balances continued support for the economy with the need for fiscal consolidation". The spending framework sets "explicit limits for budget expenditure" and aims for "sustained but moderate real growth in spending and a gradually declining deficit".
The treasury underlined the government's commitment to "eliminating wasteful expenditure"; a notion that became something of a leitmotif throughout the budget policy document.
Widening budget deficit
The numbers in the medium-term budget reiterated concern around slowed economic growth and a widening budget deficit. The budget deficit, excluding extraordinary transactions, was R143.9-billion in 2012/13; representing 4.5% of the gross domestic product (GDP). This is projected to increase to R155.8-billion in 2013/14, staying steady at 4.5% of GDP.
Servicing debt is becoming an increasing burden on the economy. The fastest-growing expenditure item in the consolidated fiscal framework is interest payments, said the budget. The trend, it said, reflects the "substantial increase in government's debt stock in recent years".
The revised government borrowing budget was moderated from R178-million to R168.5-million for 2013/14. However, the pullback comes before a projected need to increase government borrowing over the next two years.
The government projects it will need to borrow R183.9-billion in 2014/15, bringing the total net loan debt up to R1 573-billion. This is projected to decline to R164.9-billion in 2016/17, with a total net loan debt of R1 994-billion. But even though the borrowing requirement will decrease, national government net debt as a percent of GDP will grow. It is anticipated to reach 39.3% as a total of GDP in 2013/14 and climb to 43.9% in 2016/17.
The weaker rand exchange rate has pushed up the value of foreign-denominated debt, and inflation has had the same effect on inflation-linked debt, according to the budget.
Nevertheless, South Africa's debt-to-GDP ratio "remains sustainable", said the treasury, pointing out that the International Monetary Fund reached the same conclusion in a recent assessment.
National Development Plan
Despite the growth of national debt, the budget made strong, repeated commitments to the NDP.
"The budget framework … seeks to transform the quality of public expenditure by shifting resources to implement National Development Plan priorities, improving infrastructure allocations, and stepping up efforts to combat waste, inefficiency and corruption. Government is preparing cost-containment instructions to limit wasteful expenditure," said the minister.
In line with NDP priorities, health and education continues to receive the largest allocations, while budgets related to infrastructure, jobs, local government and community development "grow strongly".
According to the policy framework, R2.5-billion has been reprioritised through the fiscus to support infrastructure modernisation projects. The baseline of the transport, energy and communications function is projected to grow by an average annual rate of 7.9% to R105.8 billion in 2016/17.
National funding shifts
According to the medium-term budget policy statement, reprioritisation of national funds are proposed to take place place in the following areas:
- R1-billion was allocated to cover the costs of inflation-related and other salary adjustments.
- R374-million was earmarked to provide broadband connectivity to public schools.
- R170-million to cover the effect of rand depreciation on expenditure in foreign currencies in 2013.
- R150-million was allocated to deploy troops in the Democratic Republic of the Congo.
- R57-million for contractual penalties incurred by Denel Aerostructures related to the A400M aircraft contract.
- R20-million was allocated for substance-abuse prevention.
- R18-million was set aside to repair infrastructure damaged by floods.
- R508-million will be refunded to departments for expenditure financed by departmental revenue paid into the National Revenue Fund.
It is estimated that R3-billion will not be spent in 2013/14 and declared as unspent funds by departments. R754-million rolled over from unspent balances in 2012/13.
Planting the flag
Ahead of the budget, financial services group Nomura's economist Peter Attard Montalto predicted that Gordhan would use the opportunity to "firmly though subtly plant its flag in the NDP debate on the side of the NPC [national planning commission] and against Cosatu". The budget's open embrace of the NDP could be viewed as a realisation of this.
However, Attard Montalto noted that in so doing the "national treasury is treading a difficult path".
"On the one hand it [the treasury] must be strategic with its backing for NDP and reform, and in a similar vein keep investors onside with a credible message on reform. However, on the other it has the real-politick of both the current state of the tripartite alliance and upcoming election".
It is up to the markets and the upcoming election to reveal how well he achieved both.