A Prudent Budget in Uncertain Times
Over the past few weeks South Africa has been reeling in the wake of a serious industrial crisis. The crisis, characterised by a series of violent strikes and disruptions to activity in the mining, manufacturing and transport sectors has featured prominently in the international press. This has called into question the ability of government to address South Africa’s challenges. It is against this backdrop that Finance Minister Pravin Gordhan delivered the 2012 Medium Term Budget Policy Statement (MTBPS).
While acknowledging that the recent deterioration in the outlook for the global economy and heightened domestic tensions had placed the South African economy under renewed pressure, Minister Gordhan emphasised that South Africa is in a stable fiscal position. In a bid to reassure investors the Minister noted that National Treasury would continue to manage government finances in a prudent and countercyclical manner and that contrary to rating agencies suggestion, no significant measures to change the current fiscal trajectory are required.
Reflecting more challenging economic conditions, National Treasury revised its GDP forecast lower and now expects the economy to expand by 2.5% y/y in 2012 and 3.0% in 2013 ( as compared to 2.7% and 3.6% previously). In light of slower than anticipated growth, the South African Revenue Service(SARS) has also revised its revenue targets for the next three fiscal years downwards, the revenue target for 2012/13 has been lowered by R5 billion.
Downward Revision to GDP Forecasts
Following on from the February budget, limiting growth in overall expenditure was again one of the central themes. In particular, the reprioritisation of funds to reflect key priorities and greater expenditure discipline were stressed. It was encouraging to hear, that despite a higher-than-anticipated public sector wage settlement (above-inflation), overall government spending will be maintained at levels set in the 2012 budget. In order to achieve this R40 billion in spending over the three-year MTEF period has been reprioritised towards infrastructure investment, economic development, education and healthcare. The Minister has also pledged to contain growth in the public sector wage bill over the next three years, with compensation of government employees expected to fall from 35% of total budget revenue currently to 34% in 2015/16.
Forecast Government Revenue and Expenditure
With slower growth in tax revenues forecast, Treasury expects the budget deficit to widen to 4.8% of GDP this fiscal year (as compared to 4.6% forecast in February). A gradual in reduction in the budget deficit to 3.1% of GDP in 2015/16 is forecast which will allow government to maintain a debt-to-GDP ratio of just below 40% within the MTEF period.
From a policy perspective, the budget was very much “business as usual” with no significant interventions or revenue initiatives announced. While for the moment National Treasury is relying on spending restraint to reduce the budget deficit and maintain a sustainable debt levels, they cautioned that should the outlook for the economy deteriorate further, higher taxes may be considered.
Given the more constrained budget, it appears likely that the implementation of more ambitious policy initiatives will be postponed - for example there was little mention of the National Health Insurance (NHI) scheme. In an attempt to promote greater efficiency and transparency in spending, additional checks will be introduced.
The focus in the MTBPS was on maintaining prudent fiscal management; in next year’s budget we hope we hope to see greater emphasis on policies that will help to address South Africa’s longer-term challenges – in particular, the poor quality of basic education, burgeoning youth unemployment and lack of adequate support for small and medium enterprises.
Overall it was a conservative budget, appropriate for an outlook fraught with uncertainty.