The budget was a steady-as-she-goes affair, with Finance Minister Pravin Gordhan emphasising fiscal prudence in the face of a slightly higher budget deficit than expected in October last year and added pressure to create jobs.
Once again the ability of the treasury to steer economic policy will be tested against the ability of other government arms to deliver on services and projects aimed at growing the economy and jobs.
Concern about underexpenditure, particularly on infrastructure at local level and the coordination needed within government to effect microeconomic policy, hummed in the background of the budget numbers.
And though Gordhan called for “game-changing ideas” similar to that of the treasury’s proposed youth wage subsidy, it remains to be seen how this proposal makes it through the National Economic Development and Labour Council process in the face of labour opposition.
The budget deficit is projected to reach 5,3% for 2010-2011, falling to 4,8% in 2012-2013 and 3,8% in 2013-2014. This is slightly higher than the projections given during the medium-term budget policy statement.
Gordhan told journalists on Wednesday that it was partly as a result of disappointing returns from corporate taxes as companies recovered from the recession. In addition, natural disasters such as the flooding around the country in recent months contributed to unforeseen expenditure.
Thanks to the large deficit, government’s debt servicing costs are expected to rise from R77-billion to R104-billion in 2012-2013, making it the fastest-rising category of spending in the next three years.
A return to era of budget surpluses
But Gordhan emphasised that it aimed to return to an era of budget surpluses as economic recovery deepened and economic growth reached higher levels.
This was in line with the broader discussions on fiscal guidelines to support sustainable government spending. The treasury was submitting guidelines to Parliament proposing that government adopt annual targets for a budget balance consistent with long-term growth, the desired level of public debt and intergenerational considerations. It also proposed making explicit the costs of existing and new programmes that require expenditure commitment over the long term.
Similarly, Gordhan emphasised that the government was reluctant to exceed a debt-to-GDP ratio of 40%, which it was set to reach only in 2015-2016.
Currently, total net loan debt as a percentage of GDP was estimated at 31%, but this is expected to rise to 34% in 2011-2012 and 39% in 2013-2014.
But although prudent macroeconomic policy remains a focus for Gordhan, delivery is still a problem, especially when it comes to underspending. The failure of government to deliver on infrastructure spending was of particular concern.
Delivery, underspending still a problem
The public sector failed to spend R12,4-billion of the money budgeted for capital expenditure projects, mostly at local government level. Local governments failed to spend 17c out of every rand budgeted for capital expenditure in 2009-2010, with this trend also visible at provincial and national level.
In a bid to address this, the government is adopting a new approach to budgeting and planning for capital infrastructure, particularly to work relating to housing and public transport.
These measures are in line with those announced in 2010 to improve state procurement and halt corrupt practices within the government supply chain. The measures are going to be included in treasury regulations as of 2011 and include making information on tender awards available to the public and introducing stringent and punitive measures for officials and suppliers caught up in irregularities.
In his speech Gordhan pointed to the revision to baseline estimates that were required as a result of the very steep 2010 public sector wage settlements. It required an additional R39,4-billion for the remuneration of public sector employees over the medium term.
The public service salary bill has doubled in the past five years, he said, rising from R156-billion to R314-billion — or more than 40% of consolidated non-interest expenditure.
Gordhan said that compensation costs for state employees were expected to increase by 6,3% this year. But he said this was an increase in all personnel-related costs, including the hiring of new employees, so it in no way meant public servants could expect a 6,3% increase.
Implications for monetary policy
In terms of the implications the budget had for monetary policy, Reserve Bank governor Gill Marcus said it depended on the effectiveness of microeconomic policy, particularly within the framework of the new growth path.
She said that if microeconomic issues were addressed, with the “cohesion and sequencing of these policies, it would follow that all of those things would enable a situation for lower interest rates.
“Monetary policy will be dictated to by the [prevailing circumstances]. The attention to the micro as set out in the new growth path will create an enabling environment for there to be looser monetary policy, but it doesn’t start with looser monetary policy,” Marcus said.