Finance Minister Pravin Gordhan has marginally loosened South Africa's Budget deficit projection to 4.8% of gross domestic product (GDP) for 2012/13, from 4.6% previously. However, there was no hint of major fiscal slippage, despite serious domestic and economic headwinds that have placed downward pressure on the revenue-collection outlook and increased pressures on the Finance Minister to loosen the public purse strings.

The National Treasury confirmed that its revenue projections for 2012/13 had been cut by about R5-billion, to a consolidated revenue estimate of R901-billion, owing in part to ongoing industrial action in the mining sector.

Government expenditure was expected to rise to over R1-trillion, or one-third of gross domestic product (GDP) during the year, resulting in an expected deficit of R156.5-billion for the year.

But Gordhan used his Medium-Term Budget Policy Statement, which was released on Thursday, to allay concerns over major further fiscal slippages, emphasising the need for a “disciplined” spending trajectory, while retaining a counter cyclical fiscal stance.

The deficit would decline more slowly than previously expected, owing to the slower-than-expected recovery rather than any marked growth in spending. Under current projection,  the deficit would be reduced to 4.5% in 2013/14, to 3.7% in 2014/15 and to 3.1% by the end of the three-year horizon in 2015/16.

Gordhan also announced savings and resource reallocations of R40-billion and said the imminent appointment of a chief procurement officer at the National Treasury should improve the effectiveness of government spending.

The pullback follows a period of fiscal expansion, during which South Africa’s Budget balance had fallen by about 6% of GDP, from a budget surplus of 1.7% of GDP in 2007/8 to a deficit of 4.2% of GDP in 2011/12.

To ensure that expenditure moderation, the National Treasury indicated that there would be “no upward adjustment of the spending projection set out in the 2012 Budget over the first two years of the Medium-Term Expenditure Framework, with moderate growth in the outer year”.

“Departments have been instructed to prepare spending plans for 2013 within their existing baselines. New activities have to be funded through savings, reprioritization and reducing waste,” Gordhan told lawmakers.

Gordhan’s consolidation commitment came amid growing concern that South Africa would struggle to sustain its fiscal discipline amid growing social discord, which was underpinned by a 25%-plus unemployment rate, as well as high levels of poverty and inequality.

“Over the next three years spending growth will remain stable and well contained, while continuing to support social priorities and enhancing the contribution of the public finances to output growth,” Gordhan said, while arguing that the actions being taken would restore the deficit to sustainable levels and begin rebuilding fiscal space.

Gordhan said a balance would be sought between fiscal consolidation and continued support for an economy whose recovery had been weaker than initially anticipated - a message designed partly to appease foreign and domestic investors, as well as the credit rating agencies, following recent downgrades by both Moody’s and Standard & Poor’s.

The National Treasury lowered its growth projection for 2012 to 2.5%, from the 2.7% figure forecast in the February Budget, which itself was a downward revision from the 3.4% forecast in October 2011 – the South African economy grew by about 3% in 2011.

For 2013, government was projecting growth of only 3%, as compared with 3.6% previously, rising to 3.8% (4.2%) in the 2014 period and to 4.1% in 2015.

Also emphasised in the statement was the desire to shift the balance of resource allocation towards investment in infrastructure, while also stabilising public debt over the period.

The main budget borrowing requirement is projected to increase from R165.5-billion in 2012/13 to R173.7-billion in 2013/14, before declining to R151.5-billion in 2015/16. Government debt was expected to peak at 39.2% of GDP in 2015/16.

INFRASTRUCTURE PUSH

Infrastructure remained Gordhan’s main stimulus lever, with a construction programme of R845-billion currently under way. Gordhan said government was exploring options for boosting infrastructure funding through enhancing the role of South Africa’s development finance institutions and by mobilizing private sector capacity.

Gross fixed-capital formation by the public sector rose at a yearly rate of 10.9% during the first half of 2012, on the back of investments by Eskom, Transnet and the South African National Roads Agency Limited, which accounted for about 95% of capital spending by State-owned companies (SoCs)

The bulk of the spending, which could amount to more than R3-trillion over 20 years, would be financed from the balance sheets of the SoCs, but over the next three years, budgeted capital allocations amounting to R250-billion would finance those projects that were “shovel ready”.

The National Treasury stressed that cost recovery from “user charges” was essential to ensure the sustainability of long-term financial commitments associated with capital investment in infrastructure.

"The risk of further sovereign rating downgrades needs to be considered. Although the impact of recent rating actions on the yield on government debt has been very limited, further downgrades would raise the cost of borrowing,” the statements said.

Gordhan again stressed the need for government to shift the composition of spending from consumption to productive investment, which would require “moderation in personnel expenditure”.

Since 2008/09, personnel spending had increased from 33% to 35% of total government expenditure.

Government and public service unions signed a three-year wage settlement during the year and the compensation of employees would be limited to 34% of total expenditure in 2015/16, as government restrained growth in personnel numbers.

“Our aim is to achieve a shift in the composition of spending over the period ahead towards infrastructure, investment in economic competitiveness and education and health services,” Gordhan said.