Finance Minister Pravin Gordhan has responded to the loss of economic momentum in South Africa by allowing for a moderate rise in government expenditure, which will result in the deficit rising to 5.5% of gross domestic product (GDP) in 2011/12, as compared with an estimate of 5.3% announced in February.

The slightly loosened fiscal framework also now made available R1.1-trillion for spending in 2012/13, up from the estimate of R978.8-billion for the current fiscal period to March 31, 2012.

Government also officially lowered its gross domestic product (GDP) growth forecast for 2011 to 3.1%, from 3.4% announced in the 2011 Budget of February. Further, growth was now projected to reach only 3.4% next year, 4.1% in 2013 and 4.3% in 2014 – well below the 6% to 7% levels viewed as necessary to begin dealing with South Africa’s serious unemployment rate, which currently stood at nearly 26% on the narrow definition.

In unveiling the Medium-Term Budget Policy Statement (MTBPS) in Cape Town on Tuesday, Gordhan indicated that the accommodative fiscal stance would seek to compensate for the deterioration in business activity, which slumped following the global financial crisis of 2008/9 and had “yet to regain momentum”.

The deficit was forecast to fall to 5.2% in 2012/13, instead of the 4.8% forecast in February. The MTBPS projects that the deficit would then tail off to 4.5% in 2013/14 and to 3.3% in 2014/15. Estimated gross tax revenue had also been revised downwards by R13-billion to R728.6-billion in 2010/11, owing to the weaker economic conditions.

As a consequence of the wider deficit, the main Budget borrowing requirement would increase to R181.2-billion in 2012/13, before decreasing to R150.4-billion in 2014/15. Government debt was set to rise to about 40% of GDP by 2015, after which it “should stabilise and decline”.

The fiscal framework outlined in the MTBPS made an additional R48-billion available over the
coming three years. Allocations to national departments would be increased by R1.9-billion in 2012/13, R5.8-billion in 2013/14 and R15.1-billion in 2014/15. The provincial share was revised upwards by R20.2 billion over the period and local government allocations would be increased by R5-billion.

SPENDING SHIFTS

Gordhan indicated that, over the medium term, fiscal consolidation would be pursued to rebuild “fiscal space” and government’s share of GDP, which had risen to 33.8% in 2009/10, would remain above 32% this year, and which needed to moderate to avoid a future debt burden.

This pullback would be accompanied by a shift in the composition of public expenditure towards investment and economic development.

A key target was the wage bill, which had increased to 42% of government revenue, up from 31% four years earlier.

Gordhan argued that salary increases required “careful attention”, stressing that the “principle of moderation extends also to senior management and executive salaries, and remuneration of the employees of public entities”.

“Within the corporate sector too, South Africa needs greater accountability, transparency and moderation in executive and financial sector remuneration.

“Difficult decisions” were required to change the composition of government expenditure to reinforce economic recovery and reform, and “achieve a more efficient balance between personnel, goods and services, and capital spending”.

“The proposed framework for the 2012 Budget provides for a 5% cost-of-living adjustment for public-sector employees, implemented with effect from April each year. Similar adjustments to social grants are assumed in the expenditure estimates. Increased spending on municipal services and housing is proposed, alongside progressive improvements in education, health services and social protection, stronger spending on infrastructure maintenance and investment, and support for economic development,” the MTBPS outlines.

Savings from goods and service budgets by 2013/14 should also contribute to ensuring that there was sufficient revenue to pay for current expenditure. Government borrowing, meanwhile, would be used primarily to finance investment, such as capital investment, maintenance and refurbishment, and build public capacity to plan and manage infrastructure.