South Africa to trim budget gap, ease spending

2010-10-27 13:18

South Africa’s budget deficit should fall to 5.3% of Gross Domestic Product (GDP) in the 2010/11 financial year from 6.7% in 2009/10 and spending growth will moderate in the next three years, a policy statement said today.

In its medium term budget policy statement – a budget framework for the next three years – the Treasury targeted a budget deficit of 3.2% of gross domestic product by 2014.

“Over the next three years, government will balance the short-term need for fiscal stimulus with the medium-term need to consolidate the fiscal position as economic growth recovers,” the Treasury said.

The budget moved back into the red in 2008/09 as Africa’s biggest economy ramped up spending to offset the impact of its first recession since 1992 last year.

That pushed up government borrowing to an estimated 825 billion rand in 2010/11 from 673 billion in 2009/10.

The Treasury saw tax revenue rising in line with the broader economic recovery over the next three years, from 24.4% of GDP in 2009/10 to 26.4% by 2013/14. It said that over the long-term, tax revenue had to increase to fund spending.

“If the current mix of tax instruments cannot provide sufficient resources, changes to tax policy, including higher taxes, will need to be considered.”

Finance Minister Pravin Gordhan told journalists, however, that the Treasury was not raising taxes “yet”.

Growth in expenditure will ease slightly in that time period from 33.7% of GDP to 32.3% by 2013/14.

“Government is obliged to ensure that the fiscus is sustainable so that future priorities can be afforded,” the Treasury said.

It said higher economic growth over the long term would support debt reduction although borrowing by state-owned companies such as power utility Eskom [ESCJ.UL] and logistics firm Transnet [TRAN.UL] would keep public-sector borrowing requirement at “an elevated level”.

The Treasury warned against the impact of a ballooning state wage bill that is currently at 40% of total government spending.

“Should wage growth continue to accelerate in excess of revenue growth, the sustainability of government employment, investment and other goods and services will be undermined. The proposed fiscal framework makes provision for average annual growth in compensation of 6.3%,” the Treasury

After a crippling three-week strike that closed schools and left hospitals in chaos for most of August, the government settled a wage dispute with workers with a 7.5% wage increase and a monthly 800 rand housing subsidy.

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