Our dire deficit

South Africa faces the prospect of a much higher than expected budget deficit after Finance Minister Pravin Gordhan’s announcement that a lower tax intake could mean a revenue shortfall of between R50-billion and R60-billion this year.

But economists say the country is well placed to weather the worst of the storm and that taxes are not expected to increase.

Economists predict that the budget deficit will rise to between 5% and 7%, higher than the 4% estimated in the February budget, Trevor Manuel’s last as finance minister.

Delivering his budget vote speech to the National Assembly, Gordhan said that after holding up quite well last year South Africa’s revenue collection has deteriorated in the first three months of this fiscal year.

“At the moment we are about R19-billion below our benchmark target for revenue,” said Gordhan. “If the present trend continues we could be as much as R50-billion to R60-billion below our target by the end of the year.”

Gordhan said that the country’s low debt to gross domestic product ratio meant that the government could maintain its spending levels and increase its borrowings, which would push up the budget deficit and, potentially, interest rates.

Gordhan emphasised that reducing government spending would add to the “weakness in the economy” and would have an “impact on the poor and vulnerable”.

But Mike Schussler of economist.co.za said this is not a “train smash” because South Africa’s government debt is low.

“We are in a recession and so it would be natural for government to have higher debt,” said Schussler. “To take on a higher deficit is not going to be detrimental to the economy.

“It is not anything to get concerned about, because we have saved up in the good times,” he said.

Stanlib economist Kevin Lings said he expected the budget deficit to approach 7%.

“That’s quite high in South Africa’s history,” said Lings. “But our level of debt is incredibly low by world standards, so we are able to absorb this.

“They could raise taxes, but that is not a likely option, seeing that the economy is this weak. It wouldn’t be the right move.” He said it was risky to forecast the revenue shortfall a few months into the tax cycle.

“However, government expenditure is well ahead of budget and it’s hard to see that getting reined in,” said Lings.

Schussler said that interest rates are likely to increase, meaning that rates in the immediate future would probably not fall by more than half a percentage point.

Lings said an argument could be made for further interest rate cuts to support the economy, but the Reserve Bank’s stance indicated this was unlikely. “I don’t think the Reserve Bank will look at it this way,” said Lings. “They seem to be saying they have done enough, so it is likely that we are at the bottom of the interest rate cycle.”

Lings predicted that bond yields would move higher, with the percentage increase depending on “just how bad the government’s financial situation is”.

“Long-term interest rates will probably rise, but they were already very low, so it’s not the end of the world,” Schussler said.

Schussler emphasised that when the recession bottoms out it is important for government to bring the deficit down again by curbing spending.

This echoed Gordhan’s speech, in which he stated that the fiscal space to maintain government’s spending by borrowing was “not limitless”, warning that a period of “fiscal consolidation” would have to follow once South Africa emerged from its recession.

Gordhan said that government’s view was that the economic recovery would start later this year but that it would be a “slow, gradual recovery”.

Global growth of about 2% to 3% a year was projected for the 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% for several years following the recession,” said Gordhan.

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Lloyd Gedye
Lloyd Gedye
Lloyd Gedye is a freelance journalist and one of the founders of The Con.

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