Gordhan releases medium-term budget strategy

2010-10-27 13:58

Finance minister Pravin Gordhan released the government’s three-year budget policy plan in Parliament today. Following are key excerpts from his prepared speech and an earlier press conference.

Capital inflows and exchange rate
“We recognise that the value of the rand is a critical challenge in our growth strategy. It can lead to unbalanced growth, widening of the current account deficit and increasing vulnerability to economic shocks.

“The policy challenge is how to continue to attract the long-term inflows that we need, while minimising the risks of volatile capital movements.

“We believe that international cooperation is needed to achieve a more stable international financial environment, as proposed in the recent G20 communiqué.

“South Africa’s view is that shared long-term goals and well-sequenced reforms are more likely to succeed than unilateral or protectionist steps.

“The National Treasury and the Reserve Bank will continue to purchase foreign exchange reserves. These will be funded by revenue over-runs in 2010/11, and the issuance of government bonds and debentures.

“In several countries, tax measures have been introduced to counter currency appreciation. The effectiveness of these measures is being carefully monitored. Further steps to moderate the impact of capital flows on the South African economy will be considered, drawing on both international experience and assessment of the likely local impact.”

Global efforts on currency overvaluations
“What has emerged from G20 discussions over the past weekend is the recognition that no one country is going to be able to resolve these problems of overvaluation of currencies on its own.

“There’s a great concern among emerging markets that are affected by overvaluation of currencies that any additional quantitative easing could, and probably will, result in further carry-trade, impacting on emerging markets and causing further difficulties in terms of overvaluation of currencies.

“So until we get some rebalancing, until we get the developed economies back on a path of growth so that there are further investments taking place in those economies and not all of that extra money is finding itself here, we are going to be facing this conundrum.

“There’s no doubt that the overvaluation and the appreciation of the rand has had a negative impact upon our exporters, in particular our manufacturing industry.

“There’s also no doubt that as government we need to do what we can, however limited it might appear to assist these sectors of our economy, to both survive on the one hand and thrive on the other hand.

“We need to understand though that whatever we do has to be collaborated with and done in the context of whatever global developments and whatever initiatives there are as well.”

Economic growth
“At this stage, we expect overall growth of 3% in 2010 rising to 3.5% in 2011 and 4.4%by 2013. Employment and private investment are expected to rise gradually as growth accelerates.

“The slowdown in our economy since 2008 has contributed to a narrowing of the balance of payments current account deficit from over 7% of GDP to an estimated 4.2% this year, which has been comfortably financed by capital inflows.”

“Headline CPI inflation has declined to 3.5% for the year to August, and is expected to remain below 6% over the next three years, supported by a moderation in food price trends and a relatively buoyant exchange rate.

“Supply and demand for credit has begun to improve in recent months, as consumer confidence has improved, and over the period ahead lending to businesses for investment and inventory restocking is likely to accelerate.

“The monetary policy stance will continue to target low and stable inflation to support a more competitive exchange rate and reduced investment costs through lower real interest rates.”

Current account
The current account deficit, after narrowing sharply in 2009, is forecast to widen to 4.2% of GDP in 2010 and 4.9% in 2011, before rising to 5.8% by 2013.

Budget deficit
The Treasury plans to trim the budget deficit to 5.3% of GDP in the 2010/11 financial year from a 6.7% gap in 2009/10.

National government net loan debt projected to rise from R673 billion at the end of 2009/10 to R1.3 trillion by 2013/14.

Total government revenue as a percentage of GDP is seen rising marginally from an estimated 28.4% in 2010/11 to 28.7% in 2011/12, before reaching 29.1% in 2013/14.

Total government expenditure as a percentage of GDP is seen declining gradually over three years, from estimated 33.7% in 2010/11 to 32.3% in 2013/14.


Total public sector infrastructure investment is seen at R811 billion over the next three years, down from a previous figure of R845 billion.


Tax revenue is seen recovering over three years, in line with economic growth, and is projected to rise from R679 billion in 2010/11 to R944 billion in 2013/14.

The government says it will consider changes to tax policy, including higher taxes, if the current mix of tax instruments do not provide sufficient resources.

Job creation
The government sets aside R6 billion from 2011/12 to 2013/14 for projects to help spur job creation among the youth.

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