/ 18 October 2013

Don’t expect any budget fireworks from Gordhan

Don't Expect Any Budget Fireworks From Gordhan

Finance Minister Pravin Gordhan is gearing up for his medium-term budget policy statement on Wednesday October 23, against the background of marked global economic uncertainty.

Not least of this is worry over the United States's central bank's tapering off of quantitative easing and the potential spillover effects this could have for economies like South Africa's.

At the same time, the government is gearing up for the 2014 elections while fending off public unhappiness over e-tolling and facing an outcry from Cosatu over the proposed employment tax incentive, designed to get the youth into jobs.

The expectations of economists and analysts represent a rather mixed bag.

The February budget estimated that economic growth for 2013 would be about 2.7% of gross domestic product (GDP).

But there has been a general recalibration of near- and medium-term growth expectations, Standard Bank's chief economist, Goolam Ballim, said.

"Rational beings" expectations
Most "rational beings" expect that economic growth will come in at only about 2%, he said, which is on a par with the revised growth estimates that the International Monetary Fund (IMF) announced recently.

It is likely that the state's budget deficit will be "revised modestly" upwards, said Ballim.

But the market is likely to be sympathetic to this, as it is likely to be viewed as a result of slowing growth rather than a slip in expenditure.

The state's ability to maintain expenditure targets is also key, particularly its labour costs, he said.

It had difficulty in sticking to its expenditure in the past, but Ballim said this time the outcome might be more in line with the budgetary intent, thanks to the multiyear wage agreement signed last year and a "general aura of appeasement" between the state and public sector unions.

Secondly, given constraints on revenue — thanks to subdued growth, prevailing high deficits and government debt levels — the minister will be resigned to less expenditure growth, said Ballim.

Increased efficiency and savings
The government's drive for increased efficiency and savings is a point commonly made by Gordhan. But Ballim said it is easier to talk to this issue than to implement it.

Jef Jacobs, a senior consultant at Deloitte Consulting, echoed Ballim, saying the deficit was expected to rise given the slowing growth prospects — unless spending elsewhere is cut.

But this would not be ideal and is not part of government's counter-cyclical policy framework.

Jacobs said there is room for government debt to increase. The current estimated debt to GDP ratio is approximately 38%, which is still within acceptable levels and far lower than that of many other countries (90% in France, 91% in the United Kingdom, 119% in Portugal and 118% in Ireland).

Jacobs said news about the state's infrastructure programme would be welcome, given its importance as a driver of economic activity and employment.

But, given the budgetary pressures and the elections, it is unlikely that any new major policy initiatives, including developments on National Health Insurance, will be considered for immediate approval or implementation.