Deficits are still the norm in many OECD member countries, and South Africa is no exception, reports Simon Segal
GOVERNMENT’S budget deficit, now likely to be above 6% of gross domestic product (GDP) for this fiscal year (5,8% or R29-billion was budgeted for last March), blights an otherwise impressive economic record that boasts the most buoyant economic growth, lowest inflation rate and largest net capital inflows in two decades.
Amid all the cheery economic news, government’s finances are arguably the greatest barrier to the country’s future prosperity. In a world where fiscal prudence is the trend, a 6% deficit figure — and there are some economists who talk about 6,5% — is a major turn-off to potential investors.
The major problems with a large public debt include “crowding out” private investment, adding to inflationary pressures, impairing incentives to innovate and invest, and undermining monetary policy and hence putting pressure on interest rates.
In its latest economic outlook, the Organisation for Economic Co-operation and Development (OECD) forecasts that only six of 19 developed economies it monitors will borrow more in 1996 than in 1992.
Deficits are still the norm among OECD member countries. All but Norway are expected to run deficits this year. With an estimated deficit of 8,6% of GDP Greece is the most profligate.
The United States is debating how to balance its federal budget by 2002, not whether to balance it. The European Union has set a 3% deficit ceiling before allowing member countries to join a common currency.
This is a far cry from South Africa where the government is in the uncomfortable position of having to borrow to meet the cost of servicing its debt. The interest bill (R28-billion) amounts to almost one-fifth of total spending.
At 58% of GDP, government’s debt is just below the 60% mark that economists consider prudent before a country gets caught in a so-called debt trap. But the trend in South Africa is ominous — in 1980 to 1981 government debt was 30% of GDP.
Eight months into the financial year economists expect a revenue overrun of R1,5- billion to R2-billion (R124-billion was budgeted for). This is thanks to extra revenue from customs and excise and the fuel levy. But spending is up 12% compared to the budgeted 9,5%. Hence the growth in the deficit.
Economist Edward Osborn cites the main factors behind this deficit as provincial overspending, expenditure of votes from previous years brought forward into this fiscal year, the removal of import surcharges and lower value-added tax revenue.
Acknowledging that the deficit will be larger than he budgeted for, Finance Minister Chris Liebenberg cites homeland finances as a big problem. Second and third-tier government finances are in such a mess that some economists wonder about the real extent of the public sector debt.
Liebenberg still talks about meeting the five- year target of a 4,5% deficit by 1998/1999. This will be a tough task given that potential privatisation proceeds are limited and no major economist expects economic growth to surge at, say, over 5%.
Liebenberg thus has two main options to meet his goal — curb spending or raise taxes. Neither are attractive. Pressure to spend will only intensify towards the next general election scheduled for 1999.
Liebenberg and Reserve Bank governor Chris Stals can harp endlessly to investors about government’s commitment to fiscal discipline but in the end the figures have to support the rhetoric. Investors are not convinced.