Debt will have to rise to pay for floundering state-owned entities, exchange controls have been eased and inflation targeting looks set to stay, for now.
The medium-term budget delivered on Tuesday revealed a mixed bag for Jacob Zuma’s new administration and new Finance Minister Minister Pravin Gordhan.
Read Minister Gordhan’s speech (PDF)
While South Africa’s budget deficit has reached the expected 7,6% of GDP to meet the funding needs of public entities like Eskom and Transnet, state borrowing requirements have also risen sharply to 11,8% of GDP.
Borrowing requirements are estimated at R284,5-billion for 2009/10 up from R197,8-billion or 8% of GDP in 2008/2009.
The widening deficit and increased need to borrow is set against a backdrop of poor economic growth that is expected to decrease by an average 1,9% this year.
The medium-term budget policy statement (MTBPS) noted that while government’s borrowing is expected to moderate over the medium-term, the significant infrastructure programme of the non-financial public enterprises means that public-sector borrowing will average about 9,7% over the next three years.
The MTBPS did hold some surprises however, including the easing of exchange controls. This was in a bid to bring greater stability to the rand. The currency’s volatility has been viewed as a negative force in the country’s economy.
This step has put paid to rumours that the new administration was considering steps like a fixed exchange rate to weaken the rand and boost the economy.
Similarly it stated that rising inflation has impinged on the economy but that it needed to be addressed through measures other than straightforward monetary policy.
‘Inflation rates that are higher than those of our trading partners imply decreasing competitiveness, something that needs to be countered more strongly in the period ahead through various economic policies, not only monetary policy,†read the statement.
This would suggest that calls by the left to drop inflation targeting, religiously adhered to under former reserve bank governor Tito Mboweni, have gone unheeded.
The outlook for the economy was less than sunny however, with recovery expected to be slow and uneven.
Positive economic growth is expected to return in the final quarter of 2009 but not with the same vitality as forecasts for the rest of the globe.
While the global economy is expected to expand by 3,1% in 2010, South Africa’s economic growth estimate is only expected to be about 1,5%.
Private-sector investment is only expected to recover in 2011.
The 7,6% budget deficit has swelled from 1% in 2008/09 — thanks to the increased spending on the part of government — in a bid to ease the impact of the economic crisis on the country, while tax revenues have simultaneously declined.
Tax revenue came in at R70-billion — below what was forecast — mostly as a result in declining VAT receipts and shrinking company income tax receipts, as consumers curbed their spending and businesses saw shrinking profits.
But the MTBPS did note that higher borrowing on the part of government is ‘only a temporary solutionâ€.
‘Over the medium term, the deficit will have to be reduced gradually. Failure to do so would mean that a higher proportion of public expenditure would go to service interest payments at the expense of social and economic priorities, or that government would have to raise taxes to meet rising interest costs,†it said in the statement.
Government debt is estimated to rise to 29,2% of GDP during 2009/10, however this is relatively low as compared to international counterparts. Countries like Japan have increased government debt to well over 100% of GDP.
With almost half a million jobs lost, further emphasis has been placed on job creation and poverty alleviation.
But transforming the economy meant some ‘tough choices†lay ahead, it said
‘Increasing budgets for labour-intensive public services could mean reducing expenditure elsewhere. Funding a wage subsidy might require higher taxes. Channeling incentives to labour-intensive sectors is likely to take resources away from other sectors of the economy.â€
To this end a broadening of the tax base, an increase in compliance enforcement and the possibility of new taxes have been mooted, in a bid to increase government revenue.
