Limited room for budget expansion: Gordhan

Finance Minister Pravin Gordhan tabled his 2013 Budget in the National Assembly on Wednesday, saying there was limited room for expansion, yet significant opportunities for change.

South Africa’s economy had continued to grow, but at a slower rate than projected at the time of the 2012 Budget.

GDP growth reached 2.5% in 2012, and was expected to grow at 2.7% in 2013, rising to 3.8% in 2015.

Inflation had remained moderate, with consumer prices rising by 5.7% in 2012 and projected to increase by an average of 5.5% a year over the medium-term.

“However, our trade performance is holding us back. Exports grew by just 1.1% in real terms last year, while imports increased by 7.2%,” he said.

The deficit on the current account of the balance of payments was 6.1% of GDP.
“This means, in simple terms, that expenditure in the South African economy exceeded the value of production and income by about R190 billion last year.”

This was partly a consequence of the disruption of mining sector activity and the structural reduction in mineral exports due to lower demand.

Some of the foundations of faster growth were in place. Strong capital investment by the public sector, the addition of electricity-generating capacity, relatively stable inflation, and low interest rates would support improved growth rates over the medium term.

“But this is not enough. Much more is needed. In particular, a significant increase in private sector investment and competitiveness is needed in the wider economy.

“Agriculture, manufacturing, tourism, communications – every sector has to play its part in expanding trade, investment and job creation.”

Gordhan said national development should be coupled with fiscal sustainability, to ensure that progress made would not be interrupted or reversed.

“The government relies on resources derived from the wider economy, and the best way to generate resources is to grow the economy faster and increase the tax base.

“The national development plan (NDP) targets an annual growth rate of more than five percent a year. This would double the resources available to government in the next two decades.”

However, the present reality was that growth was more modest. The economic turbulence experienced in the second half of last year had resulted in a revenue shortfall amounting to R16.3 billion.

The deficit was now estimated to be 5.2% of GDP in 2012/13. The growth outlook for the next three years had weakened, and government’s net debt was now expected to stabilise marginally higher than 40% of GDP.

Government’s approach now involved several elements, including:

  • additional measures to control spending, and reducing real expenditure growth to an average of 2.3% over the next three years, compared with 2.9% signalled in October last year (2012);
  • a reduction in the budget deficit to 3.1% by 2015/16, a level consistent with the stabilisation of debt;
  • steps to reinforce growth, building on the competitiveness enhancement programme introduced last year; and,
  • initiation of a tax policy review, a comprehensive review of spending, focusing on both spending controls and value for money in government programmes and agencies, and strengthening the capacity of the state to implement its plans and programmes.

“Government is committed to remaining within the expenditure ceiling set out in the budget. New policy initiatives over the next three years will be financed from savings, efficiency gains, and re-prioritisation.”

Gordhan said structural increases in spending required corresponding revenue increases if they were to be financed sustainably.

“If we succeed in driving growth towards five percent a year and government revenue doubles in the next 20 years, major infrastructure projects and new policy in initiatives such as national health insurance and expanded vocational education will be affordable with limited adjustments to tax policy.

“But if growth continues along the present trajectory, substantial spending commitments would require significant adjustments in revenue and reductions in other areas of spending.”

Over the next three years, R827 billion would be spent by the fiscus and state-owned companies to build infrastructure.

Financing for these projects was in place, and not affected by the spending cuts in the budget.

The fiscus had allocated just under R430 billion for schools, hospitals, clinics, dams, water and electricity distribution networks, the electrification of over a million new homes, sanitation schemes, more courtrooms and prisons, and improved bus, commuter-rail and road links.

Eskom, Transnet and other state-owned companies would fund a further R400 billion in projects.

This would be financed both through own resources and additional borrowing over the next three years, supported by Treasury guarantees, Gordhan said.

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Limited room for budget expansion: Gordhan