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Pravin Gordhan, Minister of Finance. Photo: Matthew Jordaan.

South Africa has passed a critical test in the eyes of international investors. Finance Minister Pravin Gordhan, who promised value for money in government spending, presented the 2012/13 Budget in Parliament yesterday, demonstrating that prudent financial policies are still in place.

Gordhan vowed to cut back on public sector wage increases and said the nearly R1.1 trillion in spending in the coming fiscal year would focus on long-term growth rather than current consumption.

He set investors’ fears about government finances to rest when he said the budget deficit for the current fiscal year would come in at 4.8 percent of gross domestic product (GDP). The deficit is the gap between government revenue and spending.

The figure is well below the 5.3 percent estimated at the time of last year’s Budget and the 5.5 percent revised projection made in October last year.

And Gordhan said the ratio would fall to 3 percent within two years.

At a time of heightened fears about sovereign debt risks, investors and ratings agencies have been monitoring the size of South Africa’s budget deficit because it is an indication on how much the government will have to borrow.

Experience has shown that, when the deficit remains above 3 percent of GDP for some years, the interest bill starts to drain a government’s resources.

After the financial crisis of 2007/08 and the recession of 2008/09, the deficit hit 6.6 percent of GDP in 2009/10. Attempts to reduce it have been previously thrown off course by a period of low growth that moderated revenue flows at a time of increased pressure on government resources.

Due to the delay in returning to the 3 percent level, rating agencies have commented critically, with Moody’s Investors Service and Fitch recently changing the country’s outlook on the sovereign credit rating from stable to negative.

A lower rating means higher borrowing costs, which are funded by taxpayers.

While the latest data are likely to reassure rating agencies that the government is not sliding into unmanageable debt, the news is not all good. The government’s failure to spend on capital projects is part of the reason for the narrower deficit.

Total spending is now forecast to be R6.7 billion below budget this year, largely because departments have not used their capital budgets. But, while they failed to reach their spending targets, they nevertheless achieved an increase in their own remuneration bills.

The Budget Review said the wage bill would be R8.1bn higher due to bigger-than-expected adjustments, but Gordhan announced a sharp cut-back in future wage growth.

Contributing to a lower overall deficit, revenue is expected to be R5.7bn above budget this year, mainly the result of higher corporate income tax collections.

The combined effect of higher revenue and lower spending is that the deficit in the current (2011/12) fiscal year is expected to be R12.5bn lower than budgeted.

The new three-year rolling budget takes account of changes in the economy. The GDP growth estimate for the coming year has been cut to 2.7 percent from the previous projection of 3.4 percent. This implies smaller inflows to the fiscus.

In the coming 2012/13 fiscal year, the revenue projection made previously has been revised down by R3.9bn to R904.8bn; and the expenditure estimate has been cut by R3.3bn to R1.1 trillion. The net effect is to bring the budget deficit down by R623 million to R153.5bn, or 4.6 percent of GDP.

By the 2014/15 fiscal year the deficit will return to 3 percent, reducing the government’s borrowing needs and interest bill. - Ethel Hazelhurst

The full Budget speech

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