Finance Minister Pravin Gordhan delivers his 2014 Budget speech in Parliament in Cape Town on February 26, 2014. South Africa cut this year's growth forecast to 2.7 percent, saying deep challenges persisted after a 2009 recession. Picture: Mike Hutchings

Cape Town - Despite the election in May, Finance Minister Pravin Gordhan avoided populist measures in his 2014/15 Budget yesterday, while delivering a lower-than-expected deficit for the 2013/14 fiscal year. The deficit is the gap between spending and revenue and is seen as a gauge of government financial planning.

In his Budget speech, Gordhan held the line against wasteful spending and promised resources for implementing the contested National Development Plan (NDP), a long-term blueprint for economic reform, which is opposed by the ANC’s alliance partners and by its own left wing.

If the government can deliver as promised in yesterday’s Budget speech, Gordhan has come through with flying colours, despite the challenging global backdrop.

He told Parliament that the deficit for the current fiscal year, which ends next month, would come in at only 4 percent of gross domestic product (GDP) instead of the 4.2 percent projected in his medium-term budget policy statement in October last year. Moreover, he sees the deficit subsiding to 2.8 percent by 2016/17 – lower than the October projection of 3 percent that year.

The news should go down well with rating agencies, which have already downgraded the country’s sovereign rating once, increasing the cost of debt – a bill that is paid by the taxpayer.

The budget deficit is closely watched by rating agencies. If this shortfall remains above 3 percent of GDP for a period, the cost of debt diverts government resources from social and economic agendas. A persistently high deficit also alerts rating agencies to the possibility of a future debt default.

Gordhan reaffirmed an earlier commitment to shift the focus of spending from consumption to infrastructure investment, which will stimulate economic growth.

He called for a social compact and warned: “The new economic order we seek cannot just be a pact among elites, a coalition among stakeholders with vested interests. Nor can it be built on populist slogans or unrealistic promises.”

Gordhan’s Budget reflects his priorities. Capital spending is the fastest growing item of expenditure and will outstrip inflation by 4 percentage points over the next three years, according to the Budget Review. The review says the budget for goods and services will decline in real terms over the three-year spending period. In other words, spending will grow slower than the inflation rate.

The review notes: “Goods and services required for core areas of service delivery, such as educational materials and medical supplies, are protected.”

Savings will come from a drop in the share spent on travel, catering, consultants and other administrative costs.

Departments will be audited on cost-cutting measures announced by Gordhan in October. And a series of reviews will take place during the coming fiscal year.

Despite the impressive presentation yesterday, there will be a question mark over the ability of the government to deliver on the projections. While greeting the latest figures with relief, economists and investors see dangers ahead, given the sluggish economy, which grew only 1.9 percent last year, according to Statistics SA, instead of the 2.7 percent forecast at the time of the 2013 Budget speech.

An overshoot in tax revenue was partly responsible for the lower-than-expected deficit. According to the Budget Review, tax revenue for the current year will be R1 billion higher than projected in the previous Budget and R4bn higher than the October estimate.

Econometrix chief economist Azar Jammine commented recently that government revenue in the first nine months of the fiscal year – April to December – exceeded projections “largely because growth in company tax and personal tax overshot targets”. But he warned that there could be a lagged impact on revenue collection from the slowdown in growth last year.

Rating agencies may also question the government’s ability to eliminate wasteful spending, despite Gordhan’s comment yesterday that “our present circumstances oblige us to live and spend modestly and keep a careful balance between social expenditure and support for growth”.

The global environment is changing. The Budget Review notes rising global interest rates have pushed up the cost of servicing government debt by R5bn in the 2014/15 fiscal year.

At the same time, the domestic economy shows no sign of gaining momentum, though Gordhan expects gross domestic product (GDP) to grow 3.5 percent annually by 2016. Slow growth reduces the potential tax take, boosting the budget shortfall while reducing GDP – which spells a deficit-to-GDP ratio that could be higher than yesterday’s estimates. - Business Report