Tax revenue up 8.6%, but deficit to rise

Jammine warns mining turmoil will cut income while spending increases

A REPORT from the National Treasury shows a reasonably upbeat picture of government finances, with revenue up 8.6 percent in the first five months of the fiscal year, from April to August, compared with the same period last year.

But Econometrix chief economist Azar Jammine warns that, given the turmoil in the mining industry, the gap between the government’s revenue and spending could turn out to be “significantly” bigger than the R153.5 billion estimated in the February Budget – equal to 4.6 percent of gross domestic product (GDP).

A deficit of more than 3 percent is considered unsustainable because the cost of servicing debt becomes unaffordable. So, a larger-than-budgeted deficit would attract further rating agency downgrades.

Moody’s Investors Service cut the country’ domestic bond rating from A3 to Baa1 last week. Moody’s, Standard & Poor’s and Fitch all have the country on a negative outlook, which means a series of rating cuts could follow.

At current growth rates in revenue and expenditure, the deficit for the full year would turn out to be 4.8 percent of GDP, Jammine said. This is an overshoot of only R4bn, which would be “insufficient to spook domestic bond markets”.

However, there is no reason to assume that the growth trend will persist, given the disappointing economic outlook, which will hit domestic consumption, and the labour unrest, which will cut the country’s export output.

Jammine said the recent turmoil in the mining industry “will negatively affect overall economic growth and more specifically revenue growth for the fiscus from the mining sector”.

The strike at Lonmin’s Marikana mine in August and last month had not posed a major threat to economic growth, he added. However, contagion is spreading as strikes start on other mines and in other sectors of the economy.

“The duration of the strikes in many instances has become quite extensive and is bound to have already knocked around 0.3 percentage points off GDP this year,” Jammine said.

This would cut government revenue by about R10bn.

The longer the disruptions persist the greater the damage.

The 3 percent growth forecast for the year, when the Budget was presented in February, will probably be revised down to 2.5 percent, which means a downward revision of revenue growth. And Jammine noted there was “little indication of any move to reduce budgeted growth in expenditure”.

Therefore the fiscal deficit and the government’s borrowing requirement would be larger than the budget estimates for the 2012/13 fiscal year.

The situation becomes a vicious circle, as the deteriorating picture attracts credit downgrades which, in turn, increase borrowing costs.

The lower a country’s credit rating, the higher the interest rate it has to pay to compensate investors for the risks involved in investing in South Africa.