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Budget deficit soars as economy shrinks

South Africa will keep spending to steer its way through a global downturn and its first recession in nearly two decades but promised on Tuesday to cut a record budget deficit as the economy recovers.

The government and utilities will push ahead with massive infrastructure spending, while steering money to fight poverty through welfare and for public works programmes and company incentives to help cut stubbornly high unemployment.

Investors are watching for signs of a move away from a previously conservative fiscal stance in Africa’s biggest economy due to the growing prominence of more left-leaning leadership in the ruling ANC and its trade union allies.

Analysts had warned big deficits were understandable for this year and the next given the international economic climate but should not stay that way for long.

Finance Minister Pravin Gordhan said the government would keep spending at relatively high levels for now but vowed to avoid unsustainable debt. He also signalled that debate would intensify on the issue of inflation targeting.

”The next few years is definitely not going to be business as usual,” he told reporters ahead of a speech to unveil the medium-term budget statement to Parliament, his first budget announcement since being appointed in May.

The Treasury forecast the budget deficit swelling to 7,6% of GDP in the current financial year — to March 2010 — from 1% last year, double the 3,8% seen in February.

Should this happen, the gap would be the country’s biggest since records were first kept in 1961.

The shortfall will ease gradually, with borrowing remaining relatively high to help ensure a sustainable economic recovery from a forecasted 1,9% contraction this year.

The shortfall was seen at 6,2% of GDP in 2010/11, falling to 4,2% by 2012/13, helped by a stronger economy that was seen growing 1.5 percent in 2010 and 2,7% the year after.

Debate targets
The Treasury said the government would keep to a countercyclical fiscal policy, with the space created in previous years allowing for more borrowing.

”Higher borrowing is, however, only a temporary solution,” the Treasury said. ”Over the medium term, the deficit will have to be reduced gradually.”

Failure to reduce the shortfall would lead to debt service costs crowding out social spending, or may force the government to raise taxes to meet rising interest costs.

It warned new taxes, such as environmental levies, may have to be considered and that the rate of growth in spending would have to moderate over the next few years.

After growing at around 9%% a year in real terms for the past three years, real growth in non-interest spending would average just 1% for the next three.

The Treasury saw the economy emerging from recession in the fourth quarter of this year with signs that mining and manufacturing, the sectors hit hardest by a weak global economy, may have turned the corner.

The recovery would be slow and uneven, though, with growth only seen returning to above 3% — the expansion in 2008 — by 2012, a slower recovery than other countries.

The economy enjoyed its longest ever period of expansion until the final quarter of last year that had helped reduce official unemployment to just over 20%. Since then output has plunged and about half a million jobs have been lost.

Relatively loose fiscal and monetary policy should support the recovery, although higher electricity costs and increased wages will keep pressure on inflation, the Treasury said.

Consumer inflation was seen averaging 7,1% this year, slowing to 6,3% in 2010 and only dipping below the top end of the 3% to 6% target band, on average, in 2012.

The inflation target remains in place for now, despite fierce criticism from the ruling ANC’s trade union and communist party allies, but debate would grow on the best way to tackle inflation.

”At this stage, we see no reason to change the inflation target. We do want to signal, however, that — the world over — there is a fair amount of debate, which we are monitoring,” Gordhan told reporters, adding discussions would be held soon with the central bank.

The Treasury announced a resumption in its gradual relaxation of exchange controls to help lower the cost of doing business.

Restrictions on investments abroad, and more conservative lending policies, had helped limit the impact for local banks from the global financial meltdown.

Among measures proposed, local companies will be allowed to use offshore intermediaries to invest in regional countries, and companies will be allowed to invest up to R500-million abroad, up from R50-million now.

The foreign capital allowance for individuals doubles to R4-million, with the single discretionary allowance rising to R750 000, the Treasury said. – Reuters

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