Goodbye fiscal probity. Hello big spender.
- Branko Brkic
- 28 Oct 2009 06:38 (South Africa)
Welcome to the new world of government debt – R1.3 trillion rands of it in three year’s time.
Presenting the first Budget Policy Statement of the Zuma government and his first major speech in his new post, finance minister Pravin Gordhan announced that state debt would double in three years to a level not seen since the early years of the transition to democracy.
In announcing this quick increase in government debt, Gordhan has marked his first and perhaps most significant divergence from his predecessor Trevor Manuel – a willingness to take on the risk of higher levels of debt to power the economy forward. This increase in spending is sure to placate or at least mollify the left who have for years criticised the cautious probity of Manuel.
But Gordhan also introduced several measures that might not be so welcome among the left’s new power elite: a surprise and substantial relaxation of exchange controls as well as a broad endorsement of inflation targeting.
The key facts of the budget presentation are:
- Instead of growing by 1.2% (which Manuel predicted at the start of the year), government is now expecting a contraction of 1.9%. The forward numbers have also been revised downwards, and now growth of 1.5% projected for 2010, rising to 2.7% in 2011 and 3.2% in 2012. In other words, no stellar growth for years to come.
- On the revenue side, income tax receipts are R21bn lower than expected, vat is down R31bn, customs and excise is down R9bn – or to put it another way, ouch, ouch, ouch. Overall, revenue is going to come in at around R70bn less than expected.
- Revenue declines are understandable in a recession, but usually, government moves quickly to curb spending. Not here. Government spending, mainly because of high public servant wage increases, is also higher than budget. Government expenditure is now likely to be R841bn this year.
- The result is a ballooning budget deficit, which instead of the budgeted -3.8%, is now going to come in at 7.6% of GDP.
But wait, that's not all. In its total public sector borrowing requirement, government needs to take account of the borrowing not just of itself, but also of other government institutions. Taking together the financing requirements of Eskom, other state-owned enterprises and municipalities, the total overall borrowing requirement this fiscal year comes in at R285 billion. Last year, it was R89 billion. Quadruple ouch!
These are enormous numbers, yet Gordhan has enormous political cover to increase government debt since government’s all around the world have been spending like crazy to try to secure their economies and fend off recession – a strategy that, at least in the short term, seems to have worked.
But it’s important to note that SA has gone somewhat further than most other countries. At one point in his speech, Gordhan said, almost proudly, that “budget deficits have increased in many countries across the world, but our fiscal response to the economic downturn is one of the largest”.
Yet, large fiscal responses to the economic downturn have different meanings if the economy is declining by 5.2% as it has done so far this year in Britain compared to the new expectation in SA of a 2% decline.
While it might be possible to contrast Gordhan with Manuel when it comes to taking on high levels of debt, on other topics Gordhan signalled a continuation of existing policy.
Notably, he came out in moderate support of inflation targeting. “Our inflation targeting framework is an important element in macroeconomic coordination. It has assisted in lowering inflation expectations, and in preventing inflation from undermining our competitiveness.” That’s not exactly a ringing endorsement, but it does constitute support.
He was however slightly sharper than Manuel on the vexing questions of wastage and procurement.
“ ... we need a shared compact, across all the divides in this House, and across the nation;
“We will not tolerate corruption;
“We will act forcefully against wastage;
“We will insist on value for money for the billions that we spend;
“We will clean up the procurement system and take strong action against those who feed selfishly off the state!”
That does constitute ringing endorsement. The question now is whether it will be enforceable.
By Tim Cohen
Read more: SA Treasury
Photo credits: Former tax authority chief Pravin Gordhan (C) smiles as he walks past South Africa's President Jacob Zuma (L) and his deputy Kgalema Motlanthe, at the presidential guest house in Pretoria, May 11, 2009. Gordhan was sworn in as new finance minister replacing Trevor Manuel. Zuma's cabinet was sworn in on Monday after he had promised to help millions of poor people and comfort foreign investors who want him to keep market-friendly policies in place. REUTERS/Siphiwe Sibeko