Revenue shortfall leaves government with heavy debt burden
FINANCE Minister Nhlanhla Nene said yesterday that revenue collection had underperformed due to weak economic growth, leading to increased debt accumulation.
This was adding to the expansionary fiscal stance the government took to counter the 2009 recession, the impact of which included a R60 billion tax revenue shortfall in 2009, he added.
Speaking at the official opening of the third Commonwealth stakeholder’s conference on public debt management in Sandton yesterday, Nene said net debt, as a percentage of gross domestic product (GDP), had grown from 21.8 percent at the start of the financial crisis in 2008/09 to 40.8 percent in 2014/15.
“As I said before, an expansionary fiscal stance supported the economy since the financial crisis in 2008 but this countercyclical approach has reached “Government has expanded its debt in response to difficult economic circumstances,” Nene said, highlighting that advanced economies took extraordinary measures to ease monetary policy to counter the effects of the crisis, taking their interest rates to near zero, leading to “an unprecedented rise in inflows that led to an appreciation in local currencies”.
Nene acknowledged that while the global economy had been a drag, the main constraints to growth were domes- tic in nature and recent data indicated that the domestic economic landscape remained a challenging one.
GDP growth in the first quarter of 2015 was 1.3 percent, highlighting the negative impact of the energy challenges that the country was facing.
“We have taken several steps to address the energy challenge and expect that eco- Nene said South Africa was committed to promoting structural reforms that were needed to lift growth over the long term, explaining that the government’s medium-term strategic framework set out how the country would achieve the goals of faster growth, higher employment and lower inequality in the National Development Plan.
Nene said South Africa’s economic recovery from the crisis had been much slower than had been anticipated and that while the projected growth of 2 percent in 2015 was an achievable and realistic target, 2 percent was not nearly enough to deliver the kind of tax revenue we need to address our challenges.
“With the normalisation of monetary policy in advanced economies, the ‘easy money’ is slowly drying up and this has risks for countries,” he said.
He said to continue to attract capital flows, emerging market economies would have to demonstrate strong growth prospects and good governance. Fiscal frameworks needed to be able to withstand higher interest rate costs while at the same time delivering higher growth.
On emerging market economies building strong bond markets, Nene said wellfunctioning bond markets were important drivers of economic development as they promoted the efficient mobilisation of domestic savings, financial stability and market-based monetary policies. He said the development of the local bond market had seen increased activity from international investors. The increase would mainly be on the back of a weaker rand dollar exchange rate, as well as higher oil and food prices.
Dykes and Radebe said: “The Reserve Bank will have to take the rising consumer inflation number, the weak domestic growth situation and global monetary policy trends into account when deciding on rates. While domestic growth is expected to improve from last year’s 1.5 percent, growth this year will remain muted.”
Last week, a poll of more than 20 economists by Reuters suggested the Reserve Bank would raise interest rates by 25 basis points to 6 percent in July. A May consensus had pointed to a November rise.
Azar Jammine, the chief economist at Econometrix, said the May inflation figures still left scope for the Reserve Bank to hold off increasing interest rates until September or November.
“However, a July interest rate hike could materialise in the event that the rand remains weak and that further electricity tariff hikes, over and above those already announced, are forthcoming.”
Retail trade sales released yesterday increased by an annualised 3.4 percent in April from an upwardly revised 2.5 percent in March.
This was against the market expectation of 2.1 percent.
Annabel Bishop, chief economist at Investec, said in April, the petrol price was R1.50 per litre lower year on year, with consumers potentially saving about R300 a month, and many may have spent this dividend to support retail sales growth. She said some easing in credit standards for households was anticipated from retailers and retail banks this year.