The reluctance on the part of government to use surplus revenue to cut taxes or boost spending could be motivated by the concern of allowing the economy to overheat, combined with the threat of a potentially risky further expansion in the current account deficit, a top local economist said on Friday.

Econometrics director and chief economist Azar Jammine said that the 2007 Budget was geared towards the enhancement of macroeconomic stability and sustainable growth, rather than providing a conspicuous shorter-term boost.

Speaking at a presentation in Johannesburg, he said that the State was in a position to budget for a “substantial” cut in taxes for the next fiscal year and that it could have lifted expenditure to provide a basis for growth, as South Africa had budgeted for a R29-billion overrun in tax revenues when compared with a year earlier.

But Finance Minister Trevor Manuel opted to slash public sector borrowing by another R20-billion instead. This comes on the back of his announcement in the Medium Term Budget Policy Statement that public sector borrowing would be reduced by R72-billion.

Jammine reported that government would save between R70-billion and R80-billion a year on interest payments by 2010.

“Those savings, in turn, could have been redeployed towards either real tax cuts or big increases in expenditure. Instead, one has to interpret this further reduction in the public sector borrowing as providing another boost to the bond market, which has already benefited in recent times from a downward revision of inflationary expectations,” he said.

He also suggested that the saving might be used to provide capacity to spend on social security reform, which Manuel announced in the Budget.

Earlier this week, he said that the National Treasury was proposing a mandatory, earnings-related social security scheme that would provide unemployment insurance, disability and death benefits for the income needs of dependents and a standard retirement savings arrangement. This would be financed by a social security tax, which the South African Revenue Services would administer.

Jammine also suggested that government's fear of stimulating economic activity further could be based on concerns regarding the high growth in imports and the expansion of the current account deficit.

South Africa's deficit is already running at 5,3% of gross domestic product in 2007, and this is set to rise to 5,9% over the next two years.

He noted that capital inflows were sufficient to cover the current-account deficit, but that it was owing to an abundance of global liquidity, which leads to increased investment in emerging markets.

“There is a real risk of capital inflows not being able to finance the current-account deficit on a sustainable basis,” he said, adding that there were also associated risks, such as a crash in the Rand, which would cause inflation and interest rates to surge.

Skills were another reason that Jammine highlighted to explain why government had cut back on its aggressive spending.

“One suspects that the government is recognising the constraints on managing an even higher growth rate in the form of a skills shortage and the strain on infrastructural capacity, which is already bursting at its seams,” he said.

Jammine pointed out, however, that it did not mean that government's spending was sluggish.

Public spending will grow by a further 7,7% a year over the next three years, on the back of a 9,2% increase over the last three years. The State plans to spend R534-billion in 2007/8 and this will increase to R650-billion in 2009/10.