Defence budget cut tomorrow?

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Finance minister Pravin Gordhan may tomorrow trim the defence budget in an effort to get state spending under control and free up money for service delivery.

Gordhan, until May the government’s chief tax collector, tomorrow makes his debut as finance supremo when he tables his medium term budget.

The defence budget currently stands at R32.024 billion and was set to increase in the next three years. But that was before the first South African recession in 17 years and the worst global financial crisis since the 1930s.

Treasury has already cut the defence budget by R1.98 billion over the medium term, taking

R740 469 000 from the current budget, R644 137 000 from next year`s and a further R595 638 000 from that of FY 2011/12.

As it stands, the R32 billion budget amounts to 1.3% of Gross Domestic Product (GDP); or less than five cents out of every Rand government spends.

Earlier this year, the then-Portfolio Committee on Defence recommended an increase to 1.7%. The defence department in its annual report last year said its analysis of the funding needed to support a credible force design (CFD) and peace support operations indicated “a requirement for a defence allocation of 2% of GDP.”

Next year’s budget – according to figures released this February – was to have been R32.389 billion and the 2011 budget R34.418 billion. That was, as it stood, simply an incremental increase, and nowhere near the 2% figure the military sought or the 1.7% MPs approved.

A budget cut will place the department in an awful predicament and may have grave consequences for the defence industry with key projects either being delayed further or cancelled altogether.

The DoD 2007/8 Annual Report said a CFD and current support to peace operations – a key plank in SA’s foreign policy – required defence spending to rise to R41.3 billion in the 2011/12 financial year. As can be seen above Treasury had a much lower figure pencilled in and even that is now just a happy memory.

The DoD wanted R45 billion in 2017 and R46 billion by 2023.

The annual report warned that if the money was not forthcoming, the SANDF would have to shrink to a size that “is both viable and sustainable over the long term.”

Certain defence capabilities would be reduced and other defence capabilities would be “completely lost,” it added, with the country facing “significant” national security risks and the SANDF going forward with severe limitations.

It can almost be assumed that this has now come to pass.

Efficient Group chief economist Dawie Roodt says government revenues could be as much as R90 billion short of target while government spending has ballooned.

“Revenues are currently under severe pressure because of the economic slowdown and I won’t be surprised if we see about 70, maybe 80 or 90 billion rand under budgeted estimates,” he told Business Report.

South Africa’s economic outlook has worsened considerably since the February budget when growth for the year was expected to be 1.2%. Then-finance minister Trevor Manuel at the time projected government over-spending of R95.6 billion – equal to about 3.8% of gross domestic product.

A Bloomberg poll of 18 economists expect Gordhan to announce tomorrow that this has roughly doubled to 7.5%. Deputy President Kgalema Motlanthe earlier this month hinted at 8% and put the government revenue shortfall at R70 billion, R10 billion up from a figure given by Gordhan just some months back.

Savings have to start somewhere. Considering governnment and the ruling African National Congress’ priorities, defence is “somewhere”.