Johannesburg - The government is on track to meet its fiscal targets over the next three years – with the help of a new format for presenting its consolidated accounts. In his medium-term budget policy statement yesterday, Finance Minister Pravin Gordhan said the 2013/14 budget deficit would be even lower than his February projection of 4.6 percent of gross domestic product (GDP).
Based on the previous presentation method, the deficit in the current fiscal year would equal 4.5 percent of GDP – due to “slower-than-anticipated spending”. The spending estimate for the year has been cut by R5.7 billion since the February Budget – to R1.05 trillion.
However, using the new format, the budget deficit will be a much lower 4.2 percent. And Gordhan predicts a return to the benchmark of 3 percent of GDP by 2016/17.
A figure higher than 3 percent over a prolonged period diverts government resources from productive spending to the interest bill.
Anticipating accusations of “cooking the books” to produce a smaller deficit, Gordhan reminded journalists at a press conference ahead of his speech that South Africa has been ranked second after New Zealand for the transparency of its budget presentation.
The latest figure came as a surprise. After a disastrous start to the 2013/14 fiscal year in April and May, the deficit appeared likely to breach the February projection significantly, raising the spectre of a further downgrade by rating agencies which have already cut the country’s sovereign rating by one notch, little more than a year ago.
The lower the rating, the higher the interest bill that is met by the taxpayers.
The danger of a further downgrade may have receded for the time being. While agencies will obviously not compare apples with pears, the spending moderation should be seen as a signal that Gordhan is committed to his promises to contain spending.
He noted that non-interest spending had risen by an annual average 8 percent in real terms between 2003/04 and 2011/12 but would grow by an annual average of 2.1 percent over the next three years. Real growth is calculated by stripping out inflation.
Confirmation that growth in the government’s day-to-day spending is slowing came recently from Statistics SA’s quarterly employment statistics, which showed a reduction of 13 000 in the second quarter, in the personal services sector which is made up largely of civil servants. In the past, this sector has shown the strongest pace of job creation as the government expanded.
The statement said that the Treasury and Public Service and Administration Department “are working to enforce discipline in hiring of new personnel” and would keep staff numbers constant over the next three years.
And next year’s budget will bring more details of cost containment. Measures will include restrictions on air travel, car hire, accommodation, catering, entertainment and conference budgets.
Another positive signs is that capital spending is the fastest-growing item of non-interest spending over the next three years – “exceeding inflation by 4.1 percent”.
Also reassuring for rating agencies will be the continued commitment to the National Development Plan (NDP). The NDP, formulated under the aegis of Planning Minister Trevor Manuel, has proved controversial and is opposed by ANC alliance partners Cosatu and the SACP.
“The proposed allocation of resources over the next three years is informed by government’s strategic priorities, in particular the NDP,” according to the statement.
However, a danger signal for rating agencies is that the fastest-growing budget item over the next three years will be the interest bill – “reflecting the substantial increase in government’s debt sock in recent years”.
The Treasury noted: “By 2016/17, more than R140 billion will be required to service public liabilities – an amount that exceeds current spending on health care.”
This interest bill will mount in line with rising debt levels. According to the Treasury, the government’s net debt is expected to reach 39.3 percent of GDP this year and 43.9 percent in three years time. If GDP growth is lower than expected, the ratio would be even worse. - Business Report