Mini-budget sees increase in spending

South Africa’s latest Medium-Term Budget Policy Statement (MTPS), outlined by Finance Minister Trevor Manuel on Wednesday, combines real increases in spending of 9,7% in the current 2006/07 financial year and 7% real average spending rises in each of the next three years, with almost perfectly balanced budgets in all four years.

Manuel has painted a picture of a steadily growing economy which, together with prudent past monetary and fiscal policy, has driven substantial overruns in revenue collection and falling debt service costs to allow for strong government spending increases, particularly in the priority areas of social services and correctional services.

For the 2006/07 financial year, the government’s budget deficit is set to reach R7,8-billion or 0,4% of GDP from a previous estimate of 1,5% of GDP. This compares to last year’s budget deficit of 0,3% of GDP.
Even more significant is that the budget is forecast to move into surplus in 2007/08, at R9,3-billion or 0,5% of GDP. In subsequent years it is projected to record marginal deficits, at 0,2% of GDP in 2008/09 and 0,4% of GDP in 2009/10, on the back of even sharper spending increases as infrastructure spending gathers pace.

Economic overview

Economic conditions are set to remain supportive of the budget, the government has forecast. Real GDP growth is expected at 4,4% y/y in both 2006 and 2007, rising to 4,8% y/y in 2008 and 5,3% y/y in 2009.

Meanwhile, CPIX inflation (headline inflation less mortgage costs, used by the Reserve Bank as its target measure of inflation) is estimated to come in at 4,6% y/y in 2006, rising to 5,5% y/y in 2007 and then declining to 4,4% y/y and 4,5% y/y in the subsequent years.

As for the country’s worrying current account deficit, which widened to over 6% of GDP during the first half of 2006, the MTBPS forecasts a deficit of 5,7% of GDP for 2006 as a whole, and project to average 5,6% of GDP over the following three years.

Revenue

In the latest MTBPS, Manuel has revised upward by R29,6-billion the government’s projected revenue collections for the 2006/07 financial year. The sharp increase—to R486,4-billion from R456,8-billion estimated in February’s National Budget—is attributable largely to higher-than-expected collections in corporate and individual income tax.

Main budget revenue (accounting for payments to the Southern African Customs Union) is expected to rise by R20-billion in 2006/07 to R466,4-billion (26,7% of GDP) from R446,4-billion in 2005/06.

For 2007/08, projected budget revenue has been revised upward by a massive R51-billion to R543-billion from R492-billion in the February budget.

For 2008-09, main budget revenue is revised to R586,5-billion (27,7% of GDP) from R547,1-billion previously, and for 2009/10 it has been penciled in at R633,5-billion (27,2% of GDP).

Spending

The MTBPS provides for R474,2-billion in spending in the 2006/07 financial year, with 45% of this amount spent to date. Proposed spending increases for the next three years total R80-billion, representing average real growth of 7% per year. This is a far higher rate than the country’s economic growth rate.

The additional funds are targeted mainly at the 2010 Fifa World Cup, improvements in the criminal justice system, continued infrastructure investments and investment in human development.

For 2007/08, spending is projected to rise to R533,7-billion, and then to R590,2-billion and R643,7-billion in 2008/09 and 2009/10, respectively.

Debt service costs are projected to remain relatively steady at around R53-billion over all four years, but as a percentage of GDP will decline from 3% of GDP in 2006-07 to 2,8% in 2007/08 and then to 2,6% and only 2,2% of GDP in 2009/10.

Economic services and infrastructure sees a 14,2% increase in spending over the 2006/07 to 2009/10 period from R87-billion rising to R103,9-billion in 2007/08 to R129,5-billion in 2009/10. This component includes transport and communication as well as water and related services and agriculture, forestry and fishing.

Social Services, including health, education, welfare and social security, housing and community development, constitute the bulk of spending—R262,4-billion in the current financial year rising to R359,5-billion in 2009/10. This constitutes an 11% annual growth between 2006/07 and 2009/10. Protection services sees a smaller growth of 8,9% from a projected R78,6-billion this year to R101,6-billion in 2009/10. - I-Net Bridge

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