Two weeks ahead of the medium-term budget policy statement, economists already know that the government is likely to breach its deficit target. This will compound the problems of labour disruption and policy uncertainty which are denting the country’s attractions as an investment destination.
The question is: how will Finance Minister Pravin Gordhan use the statement to restore confidence in the economy and the role of the National Development Plan (NDP)?
Gordhan’s admission yesterday, that gross domestic product (GDP) growth this year would not reach the 2.7 percent predicted in the February Budget, came as no surprise.
Lower growth means slower revenue flows, which has implications for the budget deficit. In the first two months of the 2013/14 fiscal year it seemed the deficit could top 11 percent of GDP. However, the shortfall has narrowed since then.
Econometrix chief economist Azar Jammine projects a deficit of only 5.2 percent while Absa Capital economist Peter Worthington puts it at 4.9 percent. Economists are relieved the damage has been limited.
But they are looking beyond the deficit to underlying problems. Dennis Dykes, Nedbank’s group chief economist, expressed concern at the fate of Planning Minister Trevor Manuel’s NDP, which, Dykes said, was being undermined by other ministers. Unions are also largely opposed to the NDP.
Dykes recalled that the Budget speech gave full support to the NDP, but Gordhan “is being horribly hamstrung by his cabinet colleagues who have done what they can to rip the NDP to pieces”.
Gordhan said in February that the investment plans of business were testimony to their confidence in the economy. These included R15bn for long-term mining projects.
Dykes said the controversial Mineral and Petroleum Resources Development Amendment Bill was now eroding confidence in the mining sector.
He suggested that, ahead of next year’s election, politicians were pushing “popular policies”. He warned this approach was “extremely damaging at this particular time when the country is coming under so much scrutiny”.
Other problems are looming. Lullu Krugel, a KPMG economist, said slower growth would postpone the point at which the deficit would return to acceptable territory of 3 percent. Rating agencies will not look kindly on failure to meet budget deficit targets.
Dykes and Efficient Group chief economist Dawie Roodt identified an increase in the 14 percent VAT rate as an obvious source of further revenue to plug the gap, but it is considered politically unacceptable.
Dykes noted that a higher VAT rate would also rein in consumption.
This would cut import growth and help reduce the current account deficit.