Gordhan's deficit albatross

Johannesburg - Government won't realistically be able to count on much more additional revenue in next week's Budget, which means there will be immense pressure to cut spending to meet the deficit targets set out in the mini-Budget, some economists said this week.

Finance Minister Pravin Gordhan said in October the deficit would be cut from 7.6% of gross domestic product (GDP) in the current fiscal year to 6.2% in the next, 5% in the year after that and 4.2% of GDP in 2012/13.

The deficit is important, as it is a measure of net government borrowing and an indicator of how much of government's future revenues will have to go towards servicing debt.

Though SA's deficit is much lower than, for instance, Greece's horror 12.7% of GDP this fiscal year, it has to be borne in mind that the country's whole public sector borrowing requirement isn't far off that of Greece.

Nedbank economist Dennis Dykes said even at Gordhan's GDP growth forecast of 1.5%, his projection for revenue growth of about 13% is "reasonably demanding".

"He won't be able to squeeze a huge amount more from an economy that remains fragile," Dykes said.

However, some economists disagreed, saying the minister could get more revenue from raising his GDP forecast. Gordhan's 1.5% is about a percentage point lower than private sector forecasts.

Vicious circle danger

Dykes said the focus would be firmly on controlling spending. "It's going to be a really tall order. New ministers who thought (previous finance minister) Trevor Manuel was stingy aren't going to be at all happy to have spending reined in drastically. But there's no other alternative."

Dykes said the trouble was that if the new deficit projections were higher than had been targeted in the mini Budget, an unhappy bond market would drive interest rates on government debt higher. This would create a vicious circle, with interest spending eating more and more into government spending.

Rand Merchant Bank (RMB) economists were sceptical that government would be able to follow the deficit-cutting path set out in the mini Budget.

However, they believed Gordhan could get some extra revenue from revising economic growth upwards. Higher economic growth would mean more revenue, which RMB believed would enable government to spend more than provided for in the mini Budget while bringing down the deficit.

RMB economists thought government could find it impossible to slash non-interest spending growth to just 1% per year, from the close to 10% average rate in recent years.

RMB said a real rate of increase in non-interest spending of 4% was more realistic. Given government's latest revenue assumptions, this would mean the deficit wouldn't be cut to less than 6% of GDP over the period of the medium-term expenditure framework.

RMB called this its "pessimistic" scenario, and pointed out that it didn't take account of a better GDP performance than the 1.5% growth projected in the mini Budget. The private sector consensus forecast for economic growth is 2.5%, while that of the Reserve Bank is 2%.

- Fin24.com