Business Day
*SA’s finances on safe ground, says Gordhan*** *Linda Ensor, Business Day, Johannesburg, 25 October 2012*THE government’s finances are on safe ground, Finance Minister Pravin Gordhan said in Parliament on Thursday, and not about to fall off any kind of "fiscal cliff", as credit rating agencies have suggested.
Delivering a strong message to reassure nervous investors, Mr Gordhan emphasised that South Africa had a "very sustainable and very realisable (fiscal) trajectory going forward", while the Treasury made clear in the medium-term budget policy statement that it would keep a firm grip on government spending.
"Nothing is there in the numbers to indicate that South Africa is going to fall off any fiscal cliff of any kind," Mr Gordhan said ahead of his speech on the medium-term budget policy statement in the National Assembly.
"Nothing is there to suggest — as credit rating agencies are suggesting — that we are being subjected to such pressures that we have to radically change the fiscal trajectory that we have been following for a long time," he said.
Nevertheless, the Treasury concedes in the policy statement that the economy faces risks of lower growth, rising debt service costs and the possibility of future downgrades by rating agencies. It warns that an economic slowdown — a real risk — would require further spending cuts and "new revenue initiatives" such as higher taxes.
Economic growth for this year has been revised downwards from the budget forecast of 2.7% to 2.5%. This year’s budget deficit, on the other hand, has been revised upwards to 4.8%, from the 4.6% of gross domestic product (GDP) forecast at the time of the budget, because of lower tax revenue.
The process of reducing the deficit — which widens dramatically over the next three years compared with budget forecasts — will also be much slower than anticipated so that the government can contribute to the economic recovery. As Mr Gordhan explained, South Africa’s path will not be one of fiscal austerity.
"The challenge is to navigate a path between fiscal consolidation and an excessive, premature withdrawal of support for economic recovery," the policy statement said.
*Spending to be tightly controlled*Defying predictions by rating agencies that the government would succumb to populist pressures to spend more, the policy statement proposes "sharp limits" on the growth in government spending.
"We need to live within our means," Mr Gordhan stressed.Growth in the government’s real noninterest expenditure will average 2.9% a year over the next three years, compared with the annual average of 8% between 2002-03 and 2011-12.
Unlike previous years when the policy statement increased the main budget’s spending allocations for the year, there will be no upward adjustment of the 2012 budget’s spending envelope of R1,15-trillion. The ceilings of non-interest expenditure for 2013-14 and 2014-15 will also not be increased, as is normally the case.
Government departments have had to reprioritise their planned spending over the next three years, releasing R40bn for use elsewhere, and the contingency reserve will also be used to bolster spending.
"New activities have to be funded through savings, reprioritisation and reducing waste," Mr Gordhan said.
The Treasury has also signalled a tough approach to reducing the size of the bloated public sector. Mr Gordhan said during a media briefing ahead of his budget vote speech that billions of rand could perhaps be saved by identifying ghost and surplus workers.
"Over the period ahead, the government will take a more deliberate approach to managing overall employment and wage trends across the public sector, including state-owned entities. In particular, the government will curtail unwarranted growth in personnel numbers," the statement said.
Debt would have to be stabilised to bring down the budget deficit. By 2015-16, more than R1-trillion is expected to have been added to government debt.
"The cost of servicing this debt has grown rapidly and the doubling of the debt-to-GDP ratio means that the government has fewer countercyclical options at its disposal," the policy statement said.
*Projections*The Treasury has revised its 2012 economic growth forecast from the budget’s 2.7% to 2.5%, and it believes the growth rate will improve to 3% next year, to 3.8% in 2014 and to 4.1% in 2015.
Mr Gordhan said growth would be fuelled by the government’s infrastructure investment programme and the opportunities offered on the fast-growing African continent.
The budget deficit is projected to widen dramatically compared with projections made in February. It has been forecast at 4.8% of GDP for 2012-13, compared with the 4.6% forecast in the budget, because of lower tax revenue. The deficit is expected to fall to 4.5% in 2013-14 (again significantly higher than the 4% budget forecast), to 3.7% (3%) in 2014-15, and to 3.1% in 2015-16.
Public debt is forecast to increase from 35.7% of GDP this fiscal year to 39.2% in 2015-16, while the cost of servicing the debt will climb from R89bn this year to R114.8bn in 2015-16. The main budget borrowing requirement is projected to increase from R165.5bn in 2012-13 to R173.7bn in 2013-14.
Headline consumer price inflation is forecast to remain below the inflation target limit of 6% over the next three years and is projected at 5.7% this year, 5.5% in 2013, 5.1% in 2014 and 4.9% in 2015. Of concern, though, is that food price inflation is forecast to average 9% in 2013, up from 5.1% in August this year.
Tax revenue is expected to be R5bn lower than forecast this year, at R821.4bn from the R826.4bn projected in the budget. Personal and corporate tax collections are down while value-added tax and customs duties collections have been revised upwards.
The current account deficit is expected to widen to 5.9% of GDP in 2012 — up from 3.3% in 2011 — as the trade balance deteriorates, narrowing to 5.5% in 2015-16.
*The economic context*Speaking of "strong global headwinds", the policy statement notes that the global economic outlook has weakened, with the International Monetary Fund warning of the "alarmingly high" chance of a steeper slowdown.
"The global economy is weak and seems likely to remain so for at least a few more years," Mr Gordhan told MPs.
This global context is not expected to improve in the next few years and, as such, will not support rapid domestic growth. The widespread strikes in the mining sector have had a "significant effect" on the economy in 2012, lowering production and export earnings.
"The events at Lonmin’s Marikana mine and the spread of industrial action since August have dented confidence and lowered growth prospects for the remainder of the year," the statement said. "The Treasury estimates that the total value of production lost to the platinum and gold mining strikes and stoppages since the opening of the year has amounted to about R10.1bn.
"Declining mining output and the spread of strike activity have depressed activity in related industries, including manufacturing, logistics and services, with negative consequences for GDP, tax revenues, exports and employment. The impact will be larger if strike activity is protracted."
The policy statement noted that the events underlined the "urgent need" to accelerate South Africa’s social transformation.
*Spending plans*The revised estimate of total appropriated expenditure for 2012-13 is R967.5bn — R1.9bn less than the budget’s estimate. Departments are expected to underspend R3bn.
The Treasury has not increased the available funds beyond the 2012 budget baseline but has drawn down on the contingency reserve to provide for limited increases in allocations and cater for the carry-through costs of the 2012 public sector wage agreement, which will cost the state an additional R37.5bn over the next three years.
The national appropriation will amount to R1.05-trillion in 2013-14; R1.14-trillion in 2014-15; and R1.23-trillion in 2015-16.
Contingency reserves of R4bn, R10bn and R30bn is retained in the proposed frameworks for 2013-14, 2014-15 and 2015-16, respectively, to allow for uncertainty and provide for future policy priorities. Of the R30bn left unallocated in 2015-16, R6bn will be drawn down in the 2013 budget.
Adjustments have had to be made to cover the R1.5bn additional cost of the public sector wage deal.
Spending priorities remain education, health, social development, infrastructure, fighting crime and enhancing competitiveness. Allocations to health, social assistance, education and free basic services will be maintained, while funding for economic development has also been safeguarded.
*Education gets biggest slice*Education remains the largest single item, with its allocation rising from R234bn next year to R269bn by 2015-16, growing at an average annual rate of 6.9%.
Consolidated spending on transport, energy and communication is projected to rise from R83.5bn in 2012-13 to R105bn in 2015-16, with average growth of 7.9% a year over the medium-term expenditure framework.
The general public services function has a baseline allocation of R53.3bn in 2012-13, which is projected to grow by an average of 5.2% a year over the next three years.
Consolidated spending on economic services is expected to rise from R44.6bn in 2012-13 to R52.6bn in 2015-16, an average annual growth rate of 5.6%.
Health spending grows by an annual average of 7.5% over the period, from R121.7bn to R151bn.
Provinces will get R418bn next year, rising to R478bn in 2015-16. Mr Gordhan said the increase to the baseline allocation from the contingency reserve and other revisions amounted to R38bn over three years.
Provinces will get an additional R4bn for higher than anticipated salary costs, R366m for health infrastructure. In addition, there is a R500m reduction in the local government equitable share to offset unspent conditional grant monies owed to the National Revenue Fund.
The local government share grows by an annual average of 9%, from R121.7bn in 2012-13 to R133bn next year and to R157.5bn in 2015-16. Reprioritisation and drawdowns on the contingency reserve have freed up R12.3bn for transfer to local government over the next three years.
A total allocation of R461m has been made to cover the costs of the 2013 Africa Cup of Nations soccer tournament, which will cover security, protocol and migration services.
*From: http://www.bdlive.co.za/economy/2012/10/25/sas-finances-on-safe-ground-says-gordhan*
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