Gordhan admits dampening effect of fiscal consolidation

Cape Town – The fiscal consolidation approach in the mini budget is likely to have a dampening effect on economic activity in South Africa, Finance Minister Pravin Gordhan admitted in Parliament.

But he stressed that over the medium term, a further loss of confidence and a rating downgrade – which could prompt higher interest rates and large capital outflows – remain greater risks to the economy than the likely effects of fiscal consolidation.

Broadly the fiscal approach contains two aspects: reducing the expenditure ceiling by R10bn in 2017/18 and R16bn in 2018/19, and tax measures to raise additional money.

READ: Gordhan warns of low growth trap for SA

An additional R13bn will be raised in 2017/18 and, combined with the proposals announced in the 2016 budget, will bring the total increase next year to R28bn. Government will also propose measures to raise additional revenue of R15bn in 2018/19.

These measures are expected to reduce the consolidated budget deficit from 3.4% of gross domestic product in the current year to 2.5% in 2019/20.

Net national debt is expected to stabilise at 47.9% of GDP in 2019/20, against a February projection of 46.2% of GDP in 2017/18. Government will mitigate fiscal risk by protecting the expenditure ceiling and limiting the likelihood that contingent liabilities will materialise, the medium-term budget states.

READ: Budget in a nutshell: Gordhan consolidates in difficult period

“Fiscal policy, however, cannot act in isolation. Persistently low GDP growth reflects both global economic weakness and structural constraints in the domestic economy. Achieving faster, broad-based economic growth requires action to build confidence and encourage private sector investment, alongside rapid implementation of structural reforms identified in the National Development Plan.

"Over time, faster economic growth will generate the revenue necessary for future expansion of public services. Improving GDP growth will also allow government to rebuild fiscal space”, according to the mini budget.

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