SA may be fairly healthy but more transparency is required
YOU COULDN’T HELP a small twinge of satisfaction when Greece’s debt was downgraded to junk status – below South Africa’s investment grade status. Our fiscal situation is much healthier than that of the PIGS – Portugal, Italy, Greece and Spain. However, that’s not saying much, as the PIGS are in dire straits.
Let’s take a new look at SA’s “consolidated Government finances”. It’s narrow: it’s national and provincial government, as well as social security funds, such as the Unemployment Insurance Fund. A new look at consolidated government finance – which is the headline figure reported in newspapers – will find the situation much improved from the February Budget. A late windfall in revenue ensured the Budget deficit for the 2009/2010 fiscal year is now no longer 7,3% of gross domestic product but 6,8%. Though still much higher than the original Budget, it’s psychologically important the 7% level wasn’t breached.
What the revenue windfall also means is that the increase in revenue for the fiscal year that started in April is calculated off a higher base. That means the 12,6% increase budgeted for the 2010/2011 fiscal year will yield a higher rand value for revenue. It follows that the Budget deficit will be smaller (the deficit is the difference between spending and revenue). This pattern of higher revenues continues into future fiscal years, as each increase is coming off a higher base. So for the three-year period of the Budget, the deficits will be smaller than those announced in February.
Rand Merchant Bank says that, assuming Government’s revenue growth assumptions remain unchanged, the consolidated Budget deficit then declines to 5,8% of GDP in 2010/2011 and to 3,7% of GDP in 2012/1013 (the last year in the mediumterm framework). That compares favourably to the 6,2% and 4,1% projected in the Budget. But RMB believes revenue growth could be even stronger, given that the bank is expecting higher GDP growth than Government. RMB says applying the same revenue-to-GDP multipliers Government has assumed the Budget deficit projections for the current and past fiscal year in the medium-term framework become even more optimistic at 5,5% of GDP and 3,5%.
But that all assumes one thing: that Government doesn’t overspend. And that’s a pretty big assumption. RMB says there’s a risk the deficit outcomes will be the same as in the original Budget, because Government will overspend. The overspending will be “masked” by higher revenue than originally budgeted.
Still, this is far from a Greek tragedy. However, when you look at the public sector borrowing requirement (PSBR, which includes State-owned utilities, such as Eskom and Transnet) the picture is a lot less rosy. The public sector borrowing requirement is Budgeted at 11,1% of GDP in 2010/2011, 8,8% in 2011/2012 and 7,1% in 2012/2013. In the most recent fiscal year it was a whopping 11,8% of GDP – not that far off Greece’s budget deficit of more than 13% of GDP.
But it must be noted these figures will also have been affected by the higher revenue collection at national Government level. Currently, the Treasury only plans to revise all figures in October’s miniBudget. However, given the current international concern with budget deficits an earlier revision and announcement would make sense.
Revised or not, SA’s PSBR is high – though not in the PIGS’s league. More importantly, SA’s high deficit was incurred at a time when Government debt was low. Government’s net loan debt (that is, excluding its cash balances) was only 28,2% of GDP in the 2009/2010 fiscal year. Greece’s was 115%. SA’s net loan debt will be less than 40% in 2012/2013.
But that’s also a bit misleading, because it doesn’t include public sector debt. And as we have seen with Eskom, it can happen that falls on the shoulders of the taxpayer. It would be more transparent to show public sector debt as a percentage of GDP. Though SA’s fiscal position seems healthy, a bit more transparency is required.