Finance Minister Pravin Gordhan on Wednesday indicated government would not reduce spending because of the recession, but increase borrowings instead.
”After holding up reasonably well in the past year, our revenue collection has deteriorated in the first three months of this fiscal year,” he told the National Assembly during debate on his budget vote.
”At the moment, we are about R19-billion below our benchmark target for revenue.
”If the present trend continues, we could be as much as R50- to R60-billion below our target by the end of the year.
”Assuming that spending stays as budgeted, our deficit will be higher than we estimated in February.”
It was too early in the fiscal year to make a reliable prediction of the fiscal outcome, but it was already clear that spending would substantially exceed revenue this year.
”We should remind ourselves that our fiscal position would have been far worse had we not had a surplus in 2007/08,” Gordhan said.
Because of South Africa’s low debt to gross domestic product (GDP) ratio and strong fiscal position, government could afford to maintain the present spending level and increase borrowings to offset the revenue loss.
”We can maintain our spending level, but we have to spend differently,” he said.
”We choose to do this because reducing our spending level now will add to the weakness in the economy and will impact to a greater degree on the poor and vulnerable.
”We have the fiscal space to maintain our spending by borrowing more today, but this space is not limitless and it has implications for how much room we have in the future.
”Because we choose to protect spending on … key priority areas, it implies that we will have to find savings in other parts of the budget,” Gordhan said.
Cabinet would work collectively to review spending plans, reprioritise the budget, reduce wastage and inefficiency, and get greater value for each rand spent.
”Increasing our deficit today as a result of falling revenue is a sensible economic strategy to cushion our economy from the effects of the downturn.
”Increasing spending further when revenue is falling, especially spending that cannot easily be reversed, cannot be justified.
”Our fiscal response to the crisis constitutes a significant contribution to sustaining growth and investment in the economy.”
Gordhan said just as responding to the crisis was important, it was equally important to start planning for the post-crisis period.
”Our view is that the economic recovery will start later this year, but it will be a slow, gradual recovery with employment growth lagging the economic recovery.”
Global growth of about two to three percent a year was projected for two to three years following the recession.
”Given our close correlation with global growth, this probably implies that we are likely to grow by about 2,5% to 3,5% a year for several years following the recession.”
Growth was likely to come from a recovery in global industrial production and higher demand for commodities as fixed investment rose in China and India.
Households were likely to gradually increase spending again next year, but consumption growth was likely to lag GDP growth for a period as household savings rose.
Reducing unemployment and poverty was likely to be much harder in the period ahead, he said.
The pro-poor nature of the budget would have to be enhanced further to ensure continued expansion of the social wage to poor households.
”We will have to continue to act to reduce inflation as this undermines our competitiveness, making it harder to grow employment.”
Further steps would have to be taken to improve competitiveness through reducing the burden on small business, enhancing competition in the economy and improving the performance of the public sector.
The Treasury would work closely with other economic departments and the Presidency to deliver on these key objectives.
As the economy recovered, revenues were likely to rise, providing the space to reduce the deficit.
However, because of higher borrowings now, interest costs would be much higher and the post-recession period would have to be characterised by a period of fiscal consolidation.
”This does not mean that budgets will have to be cut. It does mean that spending growth will be more moderate than during the previous seven years.
”This is the price we will have to pay so that we can maintain our spending levels now during the crisis,” Gordhan said. — Sapa