Gordhan faces tough task to narrow budget deficit today

A SLUGGISH economy and weak revenue means Finance Minister Pravin Gordhan may fail to narrow the budget deficit as quickly as he has pledged, putting South Africa’s credit rating at risk of a downgrade.

Gordhan presents his medium-term budget policy statement (MTBPS) this afternoon. And while he projected in February that this year’s fiscal deficit would be 3.2 percent of gross domestic product (GDP), the shortfall might be 3.4 percent of GDP, according to the median of 15 economist estimates compiled by Bloomberg.

The deficit would probably only narrow to 3 percent of GDP by 2019, well off the 2.4 percent the Treasury had targeted, according to the Bloomberg survey.

Johann Els, a senior economist at Old Mutual Investment Group, said he believed the MTBPS would probably focus on continued fiscal consolidation.

He said market participants and ratings agencies would look for adherence to the government’s expenditure ceiling.

“Despite additional expenditure pressure… we expect the government to be able to maintain adherence to the expenditure ceiling. They will have the benefit of the contingency reserves, as well as likely savings from the office of the chief procurement officer.”

Expenditure cuts

Arthur Kamp, an economist at Sanlam Investments, said available evidence from the history of fiscal consolidation in other countries suggested excessive fiscal imbalances should ideally be addressed through expenditure cuts.

“But given an unemployment rate of around 25 percent, which limits the extent to which expenditure can be cut, the National Treasury has supplemented expenditure cuts with tax increases to boost revenue growth. Cumulative tax raising measures announced since 2015/16 amount to some 1.5 percent of GDP.”

Gordhan may hint at plans to increase revenue in his fiscal framework for the next three years. The VAT rate has been unchanged at 14 percent since 1993 and the corporate tax rate, which is 28 percent, last changed in fiscal 2009.

Kamp said there were several options open to the Treasury. It might, for example, decide not to compensate for fiscal drag, implement the “sugar tax” or increase the capital gains tax or dividend tax.

“The point is the MTBPS, on balance, should… reflect the intent of the National Treasury to place South Africa’s fiscal policy on a sustainable path as it adjusts expenditure projections and tax regime to ensure the primary budget deficit returns to a surplus.”