Budget 2012 Macroeconomic Forecasts

General Observations

The 2012 National budget delivered some positive surprises on the budget deficit and overall government debt burden. Despite a deterioration in the economic outlook, which was reflected in a downward revision of National Treasury’s GDP forecasts, government anticipates that it will be able to achieve a narrower budget deficits than those predicted in the mini-budget in October last year. Expected GDP growth for 2012 has been revised downward from 3.4% to 2.7% while growth for 2013 has been revised from 4.1% to 3.6%.

Despite the lower GDP growth forecasts, National treasury expects to receive an additional R26bn in revenue over the current 3 year MTEF (relative to previous forecasts) and has reduced forecast expenditure by R19.6bn. In light of this, the budget deficit for financial year 2013\14 has been revised downward from 5.2% of GDP to 4.6% and forecast to narrow to 3.0% in 2014\15 (previously 3.3%). If the R6bn of anticipated but currently unbudgeted spend on the NHI is included in 2014\15 budget, the forecast budget deficit will widen from 3.0% to 3.2%.

Forecasts of revenue appear optimistic and could pose a risk to current forecasts of the budget deficit since they imply that annual real revenue growth of 4.8 per cent will outpace GDP growth of 3.7 per cent over the next three years. The expected increase in revenue may reflect in part increases in tax rates announced in this year’s budget which include an increase in tax on dividends and capital gains tax and new ad valorem taxes on luxury items - all of which target high-income individuals. Government’s ability to reduce the budget deficit however is also contingent on its ability to curtail expenditure.

National Treasury has indicated that growth in expenditure will have to be curtailed through moderation in growth of the public-sector wage bill since this is the largest component of current expenditure, and has grown considerably over the past 10 years. Compensation of public sector employees accounted for 38.7% of total non-interest spending in 2011\12 up from 35.7% in 2008/9. The increase in the public sector wage bill was due to largely to a combination of accelerated hiring and across-the-board above inflation wage increases but this has resulted in fewer resources available for social and economic infrastructure and other priorities.

As part of its plan to shift the composition of spending away from consumption towards more productive capital or infrastructure spend, government plans to award government employees an annual cost-of-living adjustment of 5% over the MTEF period and assumes the total public sector wage bill will increase by an annual average of 6.4% (including impact of additional hires). Government will spend an annual average of R395bn on the public sector wage bill over the current MTEF compared to an annual average of R107bn on capital projects or infrastructure. More than 60% of a total of R844bn planned spending on infrastructure over the period however will be undertaken by state-owned entities.

Economic growth and job creation

From the 2012 budget it is clear that improved infrastructure and network services to support industries including mining and agriculture is a central tenet of government’s plan to promote growth and job creation. The presidential infrastructure coordinating commission has identified several regional investment plans each with a series of large interconnected projects. They include investment in key rail and road freight and commodity transport corridors, investment in water infrastructure in Limpopo and the Eastern Cape and North West.

Allocation to public infrastructure in the current MTEF increased from R804bn (MTBPS) to R844bn in the 2012 budget with much of the increased allocation going to transport. R292bn will be allocated to energy infrastructure (electricity), R262bn to transport and logistics infrastructure and R75bn to water and sanitation. R3.2 trillion worth of infrastructure projects will be considered for approval in the next 8 years (to 2020) and the bulk of these are energy projects (approximately R1.9 trillion). Government is still struggling however to deliver on planned infrastructure spend - actual public sector spending realised in 2010\11 was only 68% of actual budget allocations, this partly due to delays in the construction of major capital projects (such as Eskom’s Kusile and Medupi power stations).

Debt Sustainability

Debt sustainability and the need to reduce the general government borrowing requirement remained a key focus of the 2012 budget. Government’s net loan debt (which consists of total domestic and foreign debt, less cash Balances) is expected to have reached R1 trillion by the end of 2011/12 ( 33.3 per cent of GDP) andis forecast to increase to 38.5 per cent of GDP in 2014/15, remaining below government’s self-imposed limited of 40%. These forecasts are however contingent on government’s ability to reduce the budget deficit to 3% of GDP by 2014\15 as forecast.

Government’s net loan debt including contingent liabilities as a percentage of GDP (which are the guarantees is gives on public sector entities debt such as Eskom, DBSA and Transnet) is forecast to rise to 49.8% of GDP by 2014\15 which also remains below the South African Development Communities recommended ceiling of 60% of GDP.