Will fiscal balancing act pay off?

Finance Minister Pravin Gordhan came down hard on ministerial spending this week. (David Harrison, M&G)

Finance Minister Pravin Gordhan came down hard on ministerial spending this week. (David Harrison, M&G)

The outcome from the medium-term budget policy statement was never going to be sunny and indeed the news delivered by Finance Minister Pravin Gordhan in Parliament this week was a very mixed bag.

Prospects for economic growth are gloomier than they were in February — revised to 2.1% from the 2.7% that was previously forecast for 2013.

Growth forecasts over the medium term are expected to go from 3% in 2014 to 3.5% by 2016.

Meanwhile, gross government debt rose sharply to peak at almost 50% by 2016-2017, while interest payments on that debt make up the fastest growing item on government's books.

Ahead of delivering his speech on October 23, Gordhan stressed the need for spending that supports growth but also ultimately reduces the budget deficit and brings down government debt levels.

"The fiscal path … is one that will once again try to retain that balance between supporting job creation and growth on the one hand and continuing with our project of fiscal consolidation," Gordhan said.

Global economic uncertainty
Global economic uncertainty loomed large over the government's "fiscal strategy", Gordhan noted in his speech. A major concern is the potential effect of the tightening of United States monetary policy.

This includes proposals to reduce quantitative easing, which will have implications for the government's debt costs and volatility of the currency.

At the same time, Gordhan continued to align budget spending to the National Development Plan (NDP) — which was broadly welcomed by business groups.

He said that where fiscal "slippage" was evident, this was not due to "excessive spending" or populist pressure but rather due to external economic factors.

Gordhan and his department are pushing this line in face of ongoing resistance to the NDP from trade unions.

This includes an outcry over a key policy to curb youth unemployment through the employment tax incentive bill.

Increasing efficiency within government
Gordhan continued his long-standing theme of increasing efficiency within government and obtaining better value for money.

He announced sweeping spending reforms at executive level, applying to national and provincial ministers, and throughout "broader officialdom".

These included spending limits on items such as cars, the eradication of credit card use, curbs on travel and accommodation, and a broad ban on alcohol purchases.

Thanks to technical changes in the presentation of the budget numbers the budget deficit is expected to decline from the 4.6% of gross domestic product (GDP) that was forecast in February to 4.2%. Without this technical change, the deficit is estimated to be 4.5% of GDP.

The deficit is expected to narrow to 4.1%, 3.8% and, finally, 3% over the coming three years.

Real (non-interest) growth in spending is expected to decline from an average rate of 8% between 2003-2004 and 2011-2012 to an average growth rate of 2.1% over the coming three years.

Tax collections prove resilient
While tax collections have proved resilient despite slowing economic growth, tax revenue projections have been revised down by R3-billion to R895-billion for 2013-2014.

Total budget revenue, which includes non-tax revenue such as revenue from provinces, social security funds and selected public entities, was R8.3-billion higher than forecast in February coming in at just over R999-billion.

However, over the medium term, total budget revenue for 2014-2015 was projected to come in lower than expected in February, at just over R1-trillion.

The government's debt-to-GDP ratio rose substantially from estimates in February, with total gross loan debt rising to 44.8% for 2013-2014.

Over the next three years it will rise to 46% in 2014-2015, 47.3% in 2015-2016 and 47.7% in 2016-2017.

Net loan debt — which consists of total domestic and foreign debt, less cash balances — was revised to around 40% of GDP, peaking at 43.9% in 2016-2017.

Billions to be required
The budget policy statement noted that, by 2016-2017, "more than R140-billion will be required to service public liabilities, an amount that exceeds current spending on healthcare", with the average annual growth of state debt costs over the medium term at 10.4%.

Deterioration in the economic growth outlook contributed to the increased debt to-GDP ratio according to treasury.
So too, did rising bond yields, which are adjusting to anticipated changes in US monetary policy.

"Over the longer term, debt is expected to stabilise, but later than previously anticipated and at a higher level relative to GDP," the treasury said in the policy statement.

Forecast deficits on the current account were also higher, with the 2013 estimate rising to 6.5% of GDP from the 6.1% expected in February.

This, along with the relatively high expectations for the budget deficit, underscores South Africa's continued vulnerability to the reversal of global capital flows in a still relatively uncertain global environment.

The treasury noted that foreign capital inflows into South Africa declined by 4% in the first half of 2013 relative to the same period in 2012: "Net purchases of bonds by international investors declined from R76-billion over the first nine months of 2012 to R37-billion over the same period in 2013."

Concerns about the domestic economy
This reflected a pullback from emerging markets and concerns about the domestic economy.

Despite the emphasis on shifting expenditure from current spending towards investment, the results are patchy. The multiyear wage agreement for the public sector has been linked to inflation, which has been higher than forecast.

As a result, public sector wages still weigh on government finances, with R2.3-billion in budget adjustments allocated to salary increases for national and provincial departments.

Employee compensation has claimed the "lion's share" of extra money found through reprioritising funds.

At the same time, growth in real gross fixed capital formation slowed to 4.1% in the first half of 2013, compared with 6% in the corresponding period of 2012.

"Unplanned delays and sluggish uptake of new projects slowed investment spending by public corporations," said the policy statement.

Public sector investment
Public sector investment growth fell to 5.7% in the first half 2013, from 8.5% in the first half of 2012.

Strikes at the Medupi power plant, and delays in capital spending by Transnet and the South African National Roads Agency Limited slowed investment growth in electricity and transport.

Concerns were also raised regarding departments under spending by R3.5-billion and the government's use of the entire R4-billion contingency reserve — money earmarked for unforeseen events.

Democratic Alliance spokesperson on finance Tim Harris said the underspending "highlights the significant capacity problems of a government" and he stressed that should we "run into unexpected difficulties" the country will be "seriously exposed".

Analysts also queried the lack of emphatic statements regarding the investment climate in South Africa.

Gordhan highlighted efforts between the government, business and labour in "to build a better investment climate", notably work by Deputy President Kgalema Motlanthe and Mineral Resources Minister Susan Shabangu to allay concerns with the mining industry, and efforts by Trade and Industry Minister Rob Davies to restore confidence in the automotives sector.

But Louis van Manen, a tax partner at Grant Thornton Johannesburg, said there was a "void between the reality and this utopia of labour and industry working together to build a strong, stable economy".

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