SA projects big budget gap as elections loom

South Africa on Wednesday projected a much larger-than-expected budget deficit for next fiscal year as the approach of elections put the government under pressure to spend more.

Finance Minister Pravin Gordhan insisted in a speech to Parliament that he was committed to a sustainable fiscal policy, and blamed the big budget gap partly on weak revenues as the economy emerged only gradually from recession. He also cited special expenditures on flood relief.

But private economists said that with municipal elections in the second quarter of this year, the budget plan underlined the heavy pressure faced by the African National Congress to spend more on job creation and social welfare. The official unemployment rate is 25%.

“The budget is a good document which will aid additional jobs growth, [but] it shows that the budget can be steered by political necessity,” said Peter Attard Montalto, emerging markets economist at Nomura.

Gordhan estimated a budget deficit in the year to March 2012 of 5,3% of gross domestic product, the same ratio that is officially projected for the current fiscal year.

That was a surprise because last October, the Treasury predicted a budget gap of just 4,6% for the 2011/2012 year.
Before Wednesday’s speech, economists had expected Gordhan to announce a deficit projection of about 4,5%.

“The impact of slightly slower growth in revenue and the additional expenditures is that the deficit for next year is ... higher than we projected in October,” Gordhan said.

The yield on 15-year government bonds rose about 10 basis points on Wednesday. Although the government said it would not issue more bonds domestically to fund the deficit—instead, it will borrow overseas—its net borrowing is projected to rise from R141-billion in 2010/11 to R162-billion in 2012/13, before declining to R149-billion in 2013/14.

Gordhan pledged the deficit would resume falling in coming years as the economy recovered, hitting 3,8% of GDP by 2013/14. But this figure would still be above the 3,2% deficit forecast for that year by the government last October.

“I think that it will come as a shock to people that the deficit is wider. Clearly to me it suggests the reality of the situation where government expenditure is under enormous pressure because of all the different areas they are trying to cater for,” said Kevin Lings, chief economist at Stanlib.

“It’s clear to me that if we are not able to grow at a faster pace, employ people and expand the tax-base, then that objective is going to be quite difficult to achieve.”

The Treasury on Wednesday shaved its economic growth forecast for calendar 2011 to 3,4% from 3,5% projected last October. The economy grew 2,8% last year, emerging from its first recession in nearly two decades.

Gordhan said strong commodity prices, low interest rates and faster global growth were the main forces behind recovery in Africa’s biggest economy. He projected growth at 4,1% in 2012 and 4,4% in 2013.

But those rates are still well below levels needed to reduce unemployment—last year the Treasury estimated annual growth of 7% was necessary to make a big dent in joblessness.

The ANC is pouring billions of rands into job-promotion schemes. Besides R39-billion already earmarked for job creation and factory investment, Gordhan said the government would spend an extra R5-billion on a youth employment subsidy to get school-leavers and graduates into work.

“We cannot view the fact that 42% of young people between the ages of 18 and 29 are unemployed as merely a statistic,” he said.

Annual inflation, at 3,7% in January, is likely to move towards the upper end of a 3% to 6% target range by 2013 as growth accelerates, the Treasury predicted.

Gordhan included one important sop to the financial markets in his budget: he refrained from announcing any fresh measures to curb the strength of the rand, beyond saying his ministry would continue to back dollar-buying by the central bank.

This omission pushed the rand up to a three-week high against the dollar, and by suggesting that money would continue to flow into South Africa seeking currency appreciation, it limited the negative impact of the budget on the bond market.—Reuters

Client Media Releases

UKZN honours excellence in research
VMware is diamond sponsor of ITWeb's Cloud Summit 2019
Sanral engages communities on projects in Matatiele Municipality