Cape Town - Finance Minister Pravin Gordhan cut his budget-deficit targets for the next three years as a weaker rand boosts tax revenue from exporters and the government pledges to stick to spending limits.
Tax collection in the year through March is set to exceed an October target by R4 billion, helping to reduce the fiscal gap to 4 percent of gross domestic product from an earlier projection of 4.2 percent, Gordhan said in his budget speech to lawmakers in Cape Town on Wednesday.
The deficit will remain at 4 percent of GDP next year, before narrowing to 3.6 percent and 2.8 percent in the following two years.
Gordhan used his last budget before the May election to highlight the achievement of President Jacob Zuma’s administration in steering the economy through a recession five years ago toward growth and fiscal stability. While tax revenue has recovered, rising interest rates and a weaker rand will boost government debt over the next three years, risking further credit rating downgrades if economic growth weakens.
“We still have an immense set of tasks and challenges facing us,” Gordhan said. “We cannot just muddle through the next decade.”
Gordhan lowered his estimate for economic growth this year to 2.7 percent from 3 percent and kept projections for the next two years unchanged at 3.2 percent and 3.5 percent. The economy expanded 1.9 percent last year as strikes in mining and manufacturing and a slump in global demand curbed exports.
The rand has slumped 2.1 percent against the dollar this year amid a sell-off of emerging-market assets, adding to pressure on inflation and prompting the Reserve Bank to raise interest rates for the first time in more than five years.
Those risks “reinforce the need to moderate public expenditure, lower the budget deficit and ensure that public sector debt stabilizes relative to GDP,” Gordhan said. “Rising global interest rates make it increasingly costly for government to borrow.”
Inflation is set to average 6.2 percent this year, exceeding the central bank’s 3 percent to 6 percent target band, and reach 5.9 percent next year, according to the National Treasury. Gross government debt will probably increase to 48.3 percent of GDP in three year’s time from 45.8 percent this year.
South Africa was downgraded by the three main credit rating companies between September 2012 and January 2013 as economic growth slowed and debt increased. Moody’s Investors Service and Standard & Poor’s have a negative outlook on South Africa’s rating, indicating the threat of a further cut.
Government revenue benefited from higher corporate and individual tax receipts in the current fiscal year as a weaker rand boosted profits of exporters and workers secured above- inflation pay increases, the Treasury said. Those factors may not persist, it said.
An improvement in the budget performance allowed Gordhan to provide tax relief of R9.3 billion in the year through March 2015, mainly by adjusting tax brackets for inflation.
“There will be continuity in policy,” Gordhan told reporters in Cape Town. “This budget is not for four months. This budget is for the next three years. There’ll be adjustments to it as we go on, but this budget is for the next administration to pick up, start running and then amend it.”