Budget surplus to disappear

Pretoria - The Budget surplus, which has become closely identified with Finance Minister Trevor Manuel's conservative approach, will disappear over the next two fiscal years as the economic slowdown bites into government revenue.

According to today's medium-term budget policy statement (MTBPS), there will be a deficit of 1.6% of gross domestic product (GDP) in 2009/10. This is a sharp turnaround from the projections made in February, which saw a surplus of 0.6% of GDP. For the current fiscal year, government will remain in surplus - but only just. The surplus for the current year is projected at 0.1% against a budgeted number of 0.8%.

The worse-than-budgeted performance this fiscal year is a break with the recent past, when government has either outperformed or come in on target. It's evidence that the pressure on revenue from the economic slowdown is already being felt.

For 2010/11, another small deficit is projected (-1.1% of GDP) while the budget is expected to be in balance in the 2011/12 year.

Budget for budget surplus

Manuel's habit of budgeting for budget surpluses has been a big bone of contention between him and the left, with Cosatu and the SA Communist Party (SACP) criticising the practice. SACP leader Blade Nzimande spoke of a deficit of 3% of GDP at the tripartite alliance summit last week, which would be almost double the amount budgeted by Manuel.

The MTBPS said as a result of weaker economic activity, tax revenue growth was expected to moderate. Following the buoyancy of recent years, a reduction of gross tax revenue as a percentage of GDP was projected. Much of this decline represented a natural reduction in the cyclical component of revenue, as economic growth and commodity prices retreated from relatively high previous levels. As the economy began to pick up pace in 2010, the revenue performance should stabilise.

This document said the slowdown in cyclical revenue would put pressure on government savings. This would be partly offset by continued adjustment in the composition of spending, with capital spending growing as a share of total expenditure. The net effect was that government savings were expected to decline marginally, but remain positive.

The MTBPS said the main Budget allowed for additional spending allocations of R170.8bn over the next three years. Eskom received support from government in the form of a R60bn loan, of which R10bn flowed this year and R50bn will come over the next two years. Of the remaining R120bn in additional allocations, the largest share (R59bn) has been designated to offset the effects of higher inflation, especially on salaries, social grants, fuel and capital projects.

- Fin24.com