Budget deficit to balloon as decline in company tax hits revenue

Ethel Hazelhurst

LATEST figures on government finances imply the shortfall between spending and revenue in the 2012/13 fiscal year will come in above expectations. Finance Minister Pravin Gordhan will announce the estimated outcome on February 27, when he publishes his financial blueprint for the 2013/14 fiscal year, starting in April.

Econometrix chief economist Azar Jammine said data for December, released on Wednesday on the Treasury website, showed a further decline in government revenue.

In the month, it was due to “a sharp fall off in company tax and secondary tax on companies”. In previous months, lower-than-expected VAT receipts were responsible for disappointing revenue streams, Jammine said.

Fortunately growth in government spending fell “very sharply” in December, to 1.1 percent year on year from 8.3 percent in November.

However, Jammine said: “The way things stand at the nine-month stage of the fiscal year, the deficit may be equal to 5.3 percent of gross domestic product (GDP) instead of the 4.8 percent Gordhan forecast in his medium-term budget policy statement in October.”

The original projection in February last year was 4.6 percent. Slowing growth prompted the mid-term revision, which is proving too optimistic.

A budget deficit higher than 3 percent of GDP cannot be sustained for a long period because debt service costs start eating into government resources. The worst case is that governments start borrowing to pay their interest bill. Greece is a prime example of a country in a debt trap.

South Africa’s finances, though deteriorating, are still comparatively sound.

And Jammine said, in practical terms, the potential overshoot of R17.2 billion on the borrowing requirement “is not enormous”. But he noted it could attract the attention of rating agencies. Moody’s Investors Service, Standard and Poor’s and Fitch have all downgraded the country over the past four months.

Rating agencies see larger than expected deficits as a sign that government finances are not under control: a situation which could eventually create the potential for a debt default.

Jammine warned further downgrades would bring the country’s sovereign rating only one notch above sub-investment grade, reducing the inward investment flows to the country and further weakening the already weak currency.

And should the rating fall out of investment grade, large global pensions funds and other institutional investors would not be allowed to place their funds in South Africa.

Renaissance Capital’s SA economist, Elna Moolman, predicted a shortfall of 5.1 percent. But she said there was a chance the deficit could come in on target, despite the revenue shortfalls. “This is because I suspect there might be further under-spending on infrastructure.”

The deterioration in government finances dates back to the recession of 2008/09, part of a global pattern following the sub-prime crisis of 2007/08 and the collapse of a number of large international banks.

The balance between spending and revenue shifted from a surplus equal to 1.7 percent of GDP in 2007/08, to a deficit of 1.2 percent in the following year and a massive 6.7 percent deficit in 2009/10,

In the 2010 medium-term statement, Gordhan said the deficit would be reduced to 3.2 percent by 2013/14. However, the date for returning to 3 percent was pushed back to 2014/15 in October. This month’s budget could see the date being postponed further. He said in October that debt service costs were projected to grow at an annual average 8.9 percent over the next few years.