Finance 101: Is the economy lurching to the left or the right? Clues in the medium term budget speech

Every October the Minister of Finance, Pravin Gordhan, delivers before Parliament the fiscal outlook for the next three years, commonly referred to as the Medium Term Budget Speech or MTBS. The backdrop to the MTBS was not positive:

       
  • Economic growth has been faltering in recent years. In 2012, Gordhan expected the economy to grow 3.5% in 2013/14 but revised this down to 2% in his speech.
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  • Ratings agencies have been downgrading South African debt in recent years citing the growth in government expenditure on salaries and social spend (dependant grants, health and education). Agencies have cast doubt on government’s will to curb this spend, in view of the deteriorating economic situation.
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  • Agencies are also concerned at the level of indebtedness of South Africa. In the next three years, Gordhan predicts it will grow by R500 billion to R1.9 trillion. Interest payments to fund this debt will be the single biggest growth item in expenditure – rising from R100 billion per annum currently to R135 billion in three years.
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  • The government has been committed to social spend to raise the previously disadvantaged out of poverty. Although this is in conflict with the ratings agencies, it is a political imperative.
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  • There has been tension within the ruling alliance (the ANC, Cosatu and the Communist Party) over economic policy. The tension is chiefly over the National Development Plan (NDP) and the ANC’s desire to bring in a subsidy to encourage youth employment.

So, how did Minister Gordhan fare? In terms of the figures shown, the Minister did quite well. In February he predicted that the budget deficit to Gross Domestic Product (GDP) would be 4.6%. Now it will come out at 4.5% due to some provinces not being able to spend their budgets and to higher income and company tax collections. Up to 2016/2017 the deficits also look manageable and fall to 3.8% of GDP. It is worth pointing out that the government is changing the methodology of measuring the budget to an IMF (International Monetary Fund) system. The IMF method is globally recognised and its measurement procedures result in a lower deficit to GDP. If you see different figures to ones shown here, it is due to this change. Expenditure (excluding interest) will be held to a 2.2% increase whilst income will grow in line with economic growth which Gordhan predicts will be 3.5% in two years’ time. Inflation will remain at current levels as will the trade deficit. Of particular interest is that National Health Insurance seems to have been put on the back burner and government officials’ perks were substantially reduced – no more official credit cards, smaller overseas delegations and less business class and expensive hotel travel. The impact of curbing perks is R2 billion a year.  The Minister also recognised that resources are getting scarcer and it will be important to make the current government expenditure go further – efficiencies are going to become a key focus. It is also important to bear in mind there is a general election in six months and no populist measures were mooted. There is no doubt the international community and ratings agencies respect Pravin Gordhan and his team.  The budget also has credibility with them and has been well received. Their major concern is the steady increase in government debt and how well will South Africa stand up to another financial shock. In the past our currency and economy have taken a beating (1998 Asian contagion, 2001 and 2008 meltdowns) and it has taken several years to recover. Finally, Minister Gordhan announced the government is committed to the NDP and the budget presented is consistent with NDP principles. He also announced a youth wage subsidy which will cost R1.3 billion next year (it has now been introduced to and passed by parliament). It seems that prudence is winning over populism. © DotNews, 2005-2013. This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

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