The national Budget is about more than just the numbers. It is also about the political commitment behind the numbers and the quality of the assumptions underpinning the numbers.
Azar Jammine, the chief economist of Econometrix, raised this issue at a post-Budget presentation in Johannesburg on Friday and warned of risks to the latest forecasts.
He said the widening in the 2012/13 budget deficit, announced last Wednesday, was unsurprising in the light of lower-than-expected global and domestic growth last year.
After a R16.3 billion tax shortfall, Finance Minister Pravin Gordhan upped his estimate of the gap between spending and revenue – from the 4.6 percent of gross domestic product projected in February last year and the 4.8 percent estimated in October – to 5.2 percent.
Deficits in the next two years were also revised upwards.
South Africa’s sovereign debt has been downgraded by the three major rating agencies over the past five months, on fears that government spending and slow revenue streams would keep the deficit high.
But Jammine said the rating agencies would not be unduly worried by the latest numbers. The changes were not great and, given the downward growth revisions, the higher deficits should not bring further downgrades.
More important to rating agencies, he said, was whether or not there were signs the National Development Plan was being implemented in the months ahead. Sceptics remain unconvinced that it will be successfully implemented.
Jammine noted the deficit estimate for 2015/16 remained unchanged at 3.1 percent. And he suggested the number “was deliberately crafted to send a message that commitment to reducing the deficit to levels of about 3 percent remained unchanged”.
But he warned that the deficit projections faced two risks in the medium term.
One risk was the strength of the global economy over the next few years; domestic growth depends on strong demand for local exports, which has been absent over the past year and shows little signs of recovery. In January, South Africa recorded a record trade deficit of R24.5 billion, partly due to disrupted supply from mines but also because slow economic activity abroad has attracted lower export revenues.
Falling profits for exporters translates into lower taxes paid to the fiscus.
The other risk Jammine identified was the 1.3 percent real average annual increase for public service wage increases, projected for the next three years.
He pointed out that wage agreements in the mining sector had been torn up as workers went on illegal strikes and said something similar could happen in the public service.
Russell Lamberti, the chief strategist at ETM Analytics, also questioned the wage projection. “It’s likely to be very unpopular and I see strikes up ahead.”
Another concern for Jammine was the decline in infrastructure spending in the coming fiscal year. “Total investment spending over the next three years has been budgeted at R827bn, down on the R845bn in the previous Budget.”
Lamberti flagged a different danger: South Africa’s dependence on foreign inflows. Nearly 36 percent of domestic bonds are now owned by offshore investors, making them the biggest single category of investors.
He said this “profound change in the ownership of public debt” adds to offshore risks. If risk aversion rises, the flows soon turn negative, a reversal which would leave South Africa unable to fund its imports.