SOUTH Africa is sailing into treacherous fiscal waters with sluggish economic growth, declining tax revenue, a widening budget deficit and higher debt levels.
These problems weighed heavily on the choices the Treasury had to make in the R1.06-trillion budget that Finance Minister Pravin Gordhan presented to Parliament on Wednesday.
His 2013-14 budget speech was delivered against the backdrop of a deteriorating labour relations environment as evidenced by the Marikana massacre and increased scrutiny by international ratings agencies, which recently downgraded South Africa’s economic outlook.
The budget stuck as close as possible to the ordinary and the orthodox. It was devoid of major new initiatives, and quietly back-pedalled on suggestions of possible tax hikes in the future, while insisting they would be measured and careful.
It offered neither dramatic spending increases nor austere cuts, but made clear the economic situation is increasingly squeezing the government.
As Mr Gordhan said at a media briefing ahead of his speech in the National Assembly, South Africa faced "heavy winds" and "tight fiscal conditions" which required reining in spending and using the contingency reserve as a cushion against more austere measures.
The budget deficit is now estimated at 5.2% instead of the 4.8% projected in October.
A total of R10.4bn has been sliced off expenditure for the next three years. Debt service costs (R100bn in 2013-14) are the fastest-growing item in the budget, rising by a real average of 4.5% over the next three years to R118bn in 2015-16. Debt will rise to R1.7-trillion — 40.3% of GDP.
The contingency reserve has been reduced by R23.5bn to avoid slashing spending which will continue to grow in real terms by an average 2.3% over the three-year period, albeit at a lower rate than the 2.9% signalled in October.
Mr Gordhan also warned of tax rises and that a possible sale of state-owned assets would be considered if growth underperformed and revenues kept sliding.
Meganomics economist Colen Garrow said taxes should have been raised immediately. He did not believe the budget would inspire business confidence.
Mr Gordhan stressed that "necessary adjustments" to the fiscal framework had to be made and insisted that the government was determined to remain within its spending envelope. "Money has been taken away from programmes that are not performing or are not aligned to government’s core priorities and given to programmes that are delivering as planned." A shift of R52bn has already occurred.
The government would continue striving to save and eliminate wasteful expenditure, enforce stricter tax compliance and fight corruption, Mr Gordhan said.
The only major new spending item was the R7.9bn recapitalisation of the Development Bank of Southern Africa.
Individual taxpayers will be compensated for inflation with R7.4bn tax relief. Only R2.3bn is added to noninterest expenditure from the 2012 budget.
The Treasury announced a youth wage employment incentive as a credit on payroll taxes.
Meanwhile, credit rating agencies gave mixed views on budget.
The comments from Fitch Ratings, Moody’s Investors Service and Standard & Poor’s reflected the differences in the assessments they made when they downgraded South Africa over the past five months.
Moody’s vice-president Kristin Lindow said the budget appeared to be "credit positive" given the Treasury’s commitment to curb spending in the face of flagging tax revenues and stick to its stated goal of significantly reducing the fiscal deficit.
"The reduction in spending and staying within their ceiling is very important in terms of signalling the priority of keeping down the deficits and debt," Ms Lindow said.
"If a deficit comes about because of a shortfall of revenue outside their control, the question is how they handle the situation — it sounds as if they are operating prudently and realistically in the circumstances."
Fitch director Carmen Altenkirch said the budget highlighted the threat posed by weaker-than-expected economic growth and underperforming revenue colletion to fiscal consolidation over the next three years.
"It is encouraging that the government has slowed down the pace of spending in order to reflect the reality of weaker revenue growth," she said.
"However, it is still concerning that debt continues to creep up. The effort it will take to bring the budget deficit back to 3.1% and contain the growth in debt will become more difficult."
Konrad Reuss, S&P MD for South Africa and Southern Africa, said last year’s budget outcome was disappointing and a "good reminder of the fact that the risks are really stacked to the downside" in terms of the country’s fiscal performance.
If the global economy did not perform as well as expected, South Africa’s growth and tax revenues would also suffer, putting the country in the same situation as last year, which would "more urgently demand spending cuts", he said.
"That is why we kept a negative outlook on the rating," he said.
With Mariam Isa