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By Arthur Kamp, 23 October 2013
The consolidated budget deficit for 2013/14 is now projected at 4.2%, lower than the 4.6% projected at the time the Budget was read in February 2013. This mostly reflects accounting changes, in line with the IMF Government Finance Statistics Manual of 2001, which allows certain extraordinary receipts to be recorded as non-tax revenue. Excluding the accounting change the expected deficit for the current fiscal year is 4.5%.
Growth disappointment has been a problem for the Treasury. Its revised real GDP growth forecast of around 3% to 3.5% over the next three years is significantly lower than previous, but is reasonable (we believe in line with the country’s current potential growth rate). As a result, the deficit is expected to narrow at a slower pace over the medium term, declining to -3.8% of GDP by 2015/16 (compared with the deficit of 3.1% of GDP for 2015/16 projected in February 2013).
Thereafter, the consolidated deficit is expected to narrow to 3.0% of GDP in 2016/17. But, the important number to watch is the primary budget balance. The MTBPS indicates the primary balance improves from a deficit of -1.1% in 2013/14 to a surplus of +0.1% in 2016/17, which should be enough to stabilise the gross government debt ratio at close to 48% of GDP (around 44% excluding cash balances) – higher than previously expected.
Importantly, the expected narrowing in the Budget deficit over the next three years relies on material expenditure restraint with the Treasury leaving the expenditure ceiling mapped out in the 2013 Budget unchanged. Certainly, in recent years, the Treasury has built a sound track record in sticking to its expenditure targets. But, to achieve the projected expenditure numbers the Treasury must restrict real non-interest expenditure growth to just 2.2%, on average, per annum, over the next three years (compared with an average 3.2% per annum for the past three fiscal years). This implies total consolidated expenditure must decline from 32.8% of GDP in the current fiscal year 2013/14 to 31.7% by 2016/17. That is a difficult task in an economy where the unemployment rate is at levels consistent with the US during the Great Depression.
We previously argued growth disappointment would lead to larger than projected deficits and a higher debt ratio over time – in the absence of asset sales or tax increases (which in turn may weaken economic activity). This is reflected in the MTBPS although the revisions are not dramatic.
On balance, today’s Budget is all we could reasonably expect with the continued slippage in the medium term deficit and debt projections reflecting expected downward revisions to the Treasury’s growth forecast and not slippage on expenditure.
Even so, South Africa is not off the global investor radar screen. The share of government consumption expenditure in GDP is at its highest level in history – contributing materially to South Africa’s poor savings performance. The low level of savings is reflected in a wide current account deficit, which has, to a significant extent been funded by debt capital inflows. The vulnerability this implies was clearly demonstrated by the sell-off in the Rand and South African bonds in May when the Chairman of the US Federal Reserve, Ben Bernanke, announced the Federal Reserve may, at some point, slow the pace of its asset purchase programme.
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