Analysis: Medium-term budget and the medium-term outlook
The economic outlook for the medium-term has taken another knock, and the hoped-for recovery that was reflected in the 2012 Budget numbers isn’t anywhere to be seen. PAUL BERKOWITZ compares the new forecasts to those of February and last year’s medium term budget policy statement.
The Treasury’s medium-term outlook for the South African economy is definitely more gloomy than it was at February’s Budget and decidedly more negative than its views were at the 2011 medium term budget policy statement (MTBPS). A year ago, the Treasury was forecasting GDP growth of 3.4% for 2012. This slipped to 2.7% in February and again to 2.5% on Thursday, a cumulative decline of 0.9%. The outlook for GDP growth in 2013 has declined even more sharply, to just 3.0% on Thursday from 3.6% in February and 4.1% a year ago.
Last year, the Treasury’s 2015 growth forecast looked a bit modest at 4.3%, but even this has been shaved to 3.8%. The Treasury only sees growth poking its head above 4% in 2016. Somewhere over the last 12 months it seems to have accepted that the economy will lose one, maybe two, years to further pedestrian growth.
The outlook for private consumption has similarly worsened. A year ago it was hoped that consumer spending growth would rise strongly to 4.4% by next year; now the Treasury believes it will only grow by 3.5%, rising to 4.2% by 2015.
There’s also a slashing of growth forecasts for fixed capital formation. For all the focus on the public sector infrastructure drive, the Treasury in February cut its forecast for next year’s growth in fixed capital formation to 4.5% from 5.7%. It has now cut the forecast for 2014 to 5.1% from 6.0%, although it sees growth rising to 5.8% in 2015.
The most notable change in the forecasts is for the current account deficit. In 2011 the Treasury saw the deficit averaging around 4.0% of GDP over the medium-term. By February the medium-term forecast for the deficit had grown to 4.5% of GDP, and on Thursday that deficit had ballooned to just under 6% of GDP for 2012 and 2013, shrinking a bit to 5.5% of GDP in 2014 and 2015. The Treasury clearly believes there is little hope of a recovery in exports over the medium-term and that the rand may stay weaker for longer.
As far as the fiscus is concerned, the optimism expressed in the February 2012 Budget has disappeared. Revenue and expenditure forecasts for the current financial year are little changed (although a greater share of that revenue will be made up from borrowings to compensate for tax shortfalls). Over the medium-term, revenue is forecast to fall while the deficit is set to increase.
Revenue for the 2013/14 financial year is expected to fall some R20-billion, while spending will only be cut by R2-billion. The deficit for the year will rise to R161-billion from R143-billion (4.5% of GDP against a February forecast of 4.0%). Revenue for the 2014/15 financial year is expected to fall R26-billion and expenditure by R2-billion, leading to a growth in the deficit to R146-billion from R122-billion (3.7% of GDP versus an earlier forecast of 3.0%). The deficit is forecast to remain above 3% in 2015/16.
The Treasury has committed itself to containing government spending within its previous targets but concedes that revenue has not recovered as previously expected and in fact will remain subdued over the medium-term.
As far as government debt is concerned, the Treasury claims it is committed to stabilising the size of government debt over the medium-term. It appears to be focusing on the relative size of the debt pile rather than its actual size. Government debt is expected to increase to 39.2% of GDP in the 2015/16 financial year from the current level of 35.7% of GDP.
While this increase seems relatively modest, and remains well below the debt-to-GDP ratios of almost all developed economies, the stock of debt is forecast to rise from less than R1.2-trillion in the current financial year to more than R1.8-trillion by the 2016/17 financial year – an increase of more than 50% in five years.
The management of this debt depends on a number of favourable assumptions, including a recovery in economic growth and a stabilisation of government’s borrowing costs. Both assumptions appear to be built on shaky foundations. However, most of the debt will be serviced beyond the medium-term: the treasury has a managed policy of smoothing its debt maturity curve through the targeted buying of shorter-term debt and the issuing of new, longer-term debt. Debt denominated in foreign currencies is also very low as a percentage of total debt (3.5%) and is forecast to remain low over the medium-term.
The Treasury’s efforts and credentials in shielding the fiscus from exchange rate and interest rate shocks may be tested over the next few years. The minister believes international ratings agencies have downgraded our sovereign ratings “(i)nappropriately”. Time will tell if he and his team will win over these agencies.
The Treasury has made a good fist of holding firm on medium-term spending and signalling its intentions to rein in public sector spending, wastage and corruption. It has drawn its line in the sand, but that might not be enough. As recent events have demonstrated, the sands under our feet can shift at a moment’s notice and they make for a shaky foundation. The treasury will surely be hoping that the social compact called for in the NDP will become a reality, and soon, so that the country has a proper bedrock on which to build. DM
Photo: A general view of the Durban Harbour with the city skyline in the background October 10, 2012. Harbour workers plan to down tools on Monday in support of the truck drivers strike, according to local media. REUTERS/Rogan Ward