In the light of growing domestic and global economic strife, Finance Minister Pravin Gordhan presented a no-nonsense medium-term budget policy statement on Thursday. The country's debt levels are set to rise over the medium term, but Gordhan and his team at the treasury have stayed spending, halting additional funding allocations and sticking to the budget ceiling outlined in February.
The minister immediately moved to allay fears over conditions in the domestic economy, declaring that South Africa was "not in terminal crisis" and that the government remained committed to a "sustainable and manageable fiscal framework".
In a media briefing in Parliament, Gordhan slated the reaction of outside observers to the country's "robust political debating culture".
"There are too many people outside of this country making judgment calls … who don't understand where we come from … as a political culture and make negative pronouncements way out of line with the realties of political developments," he said.
His comments come in the light of downgrades by credit ratings agencies Moody's and Standard & Poor's, after both raised concerns over how rising social strife, such a labour unrest at Marikana, would affect ANC economic policy in the run up to its elective conference in Mangaung in December.
However, the state faced the challenge of balancing boosting economic growth and job creation with the need to reduce a rising budget deficit and growing debt levels, Gordhan noted.
Taking a tough line on what it deemed the failure to match service delivery with an increase in the quality of spending on programmes, the treasury, with Cabinet's backing, will not adjust February's main budget ceiling upwards.
This was a "necessary shift" from the pattern of additional spending allocations that have come to be "taken for granted" over the past decade, said the policy statement.
This belt tightening comes as economic growth forecasts were revised downward, as expected, to 2.5%. This is down from 2.7% in February's budget.
On the back of a R5-billion drop in tax revenue, the budget deficit is expected to come in higher at 4.8% of gross domestic product (GDP) in 2012-2013, before declining to 3.1% in 2015-2016.
Public debt is expected to rise from 35.7% this fiscal year, peaking at 39.2% in 2015-2016.
The deficit is expected to shrink over the medium term, but the cost of servicing growing debt will grow at an average rate of 8% over the next three years.
According to the medium-term budget policy statement, by 2015-2016 it will cost R114.8-billion to service this debt, "draining resources that could be spent on productive investment and social priorities".
By the time the debt stabilises in 2015-2016, more than R1-trillion will have been added to the government's tab.
The minister stressed, as he has done in a number of previous budget iterations, the need to shift the composition of the government's spending from current needs such as public sector wages to capital investment, namely infrastructure.
"In difficult times it is important not to carry on with business as usual," Gordhan said.
Public service wages
He cast a beady eye on the growth of public service wages, which dominated spending.
"The largest share of spending is taken up by the compensation of employees, which has grown faster than other categories of spending over the past four years," Gordhan said.
To accommodate the larger than budgeted for wage settlements agreed to earlier this year the government has had to draw down on its contingency reserves.
To afford these wage increases, there was a "categorical commitment" to carefully examine the roughly R340-billion being spent on state salaries, said the minister.This would include tackling the numbers of surplus staff within the public services, where "there could be savings of billions", he noted.
Measures would also include examining levels of overtime, increases in salary notches without legitimate purposes, as well as examining the number of administrative staff against the number of skilled frontline staff such as doctors, teachers and nurses.
An increase in the levels of infrastructure spending alone was "not enough", Gordhan said.
"We also need to address the shortcomings in planning, procurement and contract management that undermine the effective use of these funds."
Measures would include addressing shortcomings, linking cash flows to project delivery and improving technical support programmes.
Poor economic performance was the main threat to the state's fiscal framework and spending plans.
The labour unrest in the mining sector had "dented confidence and lowered growth prospects for the remainder of the year".
The global economic outlook has worsened, particularly growth forecasts for other developing countries such as Brazil, China and India.
Gordhan flagged South Africa's rising current account deficit that was widening due to continued declines in exports to an ailing Europe, combined with interruptions to South African productive capacity. The current account is expected to average 5.9 % of GDP in 2012, up from 3.3 % in 2011.
The deterioration of the current account, along with the wildcat strikes had negatively affected investor sentiment towards the currency.
The currency's value had depreciated from an average of R8.01 to the US dollar in January to R8.62 in October, providing little support for manufacturing export growth, which would remain subdued.
Despite the tough times ahead, Gordhan said factors that will contribute to an improved medium-term performance included expanded infrastructure investment, new electricity generating capacity and strong regional growth.
"A substantial accumulation of cash in the corporate sector is available to finance stronger investment once confidence and growth prospects recover," said Gordhan.
See the rest of the M&G's medium-term policy statement coverage:
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Government debt to rise as tax revenues wobble
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Midterm budget: Government failing to create jobs
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Midterm budget: Money put aside to revamp mining sector
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Midterm budget: Strikes cost economy dearly
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