SA finance minister Gordhan faces tough budget balancing act

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South Africa’s government has long prided itself on fiscal discipline, but will be forced to increase spending this year to help create jobs and cushion an increasingly restive population from the aftermath of recession.

In only his second budget statement after his appointment last year, Finance Minister Pravin Gordhan will tomorrow outline spending plans for 2010/11, days after President Jacob Zuma pledged to spend R846-billion on public infrastructure over the next three years, and to improve schooling and employ more police, Reuters reports.

Zuma, also elected last year, is under increasing pressure from the ruling ANC’s labour union and communist allies to loosen government purse strings and improve the lives of millions mired in poverty nearly 16 years after South Africa achieved democracy. But this puts at risk years of fiscal prudence applauded by foreign investors who are key to boosting growth as Africa’s biggest economy recovers from its first recession in 17 years, brought on by depressed global and domestic demand.

South Africa registered positive annualised growth of 0,9% in the third quarter of 2009 after three quarters of contraction, but the economy may have shrunk close to 2% for the whole of the year. Growth averaged about 5% in the five years prior to the downturn, and Gordhan’s new prediction for 2010 is unlikely to be far off a previously forecast 1,5%.

One in four people remain unemployed after the recession slashed nearly 900 000 jobs, and South Africa’s millions are demanding the government also honour long-standing promises to boost employment and improve housing, education and health services, Reuters adds.

Toughest budget ince 1994?
“I do not envy the Minister of Finance and his team who have to draw up this budget in the most challenging conditions faced by them since 1994,” said Jac Laubscher, group economist at financial house Sanlam. “To find the right balance between all the demands on the fiscus while keeping a close eye on the macro-economic consequences of fiscal policy will be no easy task.”

With spending needs rising steadily and the economic downturn hitting revenue, the budget deficit could swell beyond the record 7,6% of GDP forecast for the current year ending March 2010, a far cry from the surpluses recorded in recent years. Gordhan estimated in October that tax revenue would be R70,3-billion less than initially budgeted for, and analysts in a Reuters poll last week forecast the 2009/10 deficit at 7,8% of GDP.

This could unsettle international markets increasingly wary of splashing money in the wake of debt crises in Dubai and, more recently, Greece and several other European countries. Bigger budget deficit were largely expected due to the global downturn but investors and rating agencies will want further confirmation of a return to more manageable shortfalls.
“The big challenge globally is for governments to begin to address the damage done to the state of government finances by the global crisis,” said Andre Roux, head of fixed income at Investec Asset Management.
“Countries which fail to do this, as the Greek example clearly illustrates, will be severely punished by the capital markets. This is a budget that is going to test Gordhan’s mettle.” Gordhan is also due to give an update on the debate around key policies like inflation targeting, which the government’s leftist allies say the central bank has pursued at the expense of economic growth by not cutting interest rates aggressively enough and saddling consumers with high debt costs.



Unions want the 3-6 percent inflation target scrapped or widened, or for the central bank’s mandate to be broadened to take into account issues like job creation. “In the current global environment, it is arguable that there is greater investor tolerance for a broadening of central bank mandates to include growth as well,” said Razia Khan, Africa head of research at Standard Chartered bank in London.
“The South African authorities may seize what could be the last opportunity to push for such a change while market tolerance for pro-growth policies persists and before inflation concerns take over globally.”