South Africa projects bigger-than-expected budget gap

Author: 
REUTERS
Publication Date: 
Wed, 2011-02-23 21:15

The ruling African National Congress faces municipal elections in the second quarter of this year, and Finance Minister Pravin Gordhan faced political pressure to spend more on job creation and welfare.
“The impact of slightly slower growth in revenue and the additional expenditures is that the deficit for next year is...higher than we projected in October,” Gordhan said in his annual Budget speech to parliament.
“Government spending continues to grow over the next three years, though at a slower rate than in the recent past,” he said, adding that extra budget allocations had been made since October, including for the damage caused by floods.
Gordhan estimated a budget deficit in the year to March 2012 of 5.3 percent of gross domestic product, the same ratio which is officially projected for the current fiscal year.
In an estimate last October, the Treasury had predicted a budget gap of 4.6 percent for the 2011/2012 year, and before Wednesday’s speech, private economists had expected Gordhan to announce a deficit projection of about 4.5 percent.
Government bond yields rose by several basis points in response to Gordhan’s speech, because of concern that government borrowing would not drop.
Gordhan insisted that the deficit would resume falling in coming years as the economy recovered, narrowing to 3.8 percent of GDP by 2013/14. This figure, however, would still be above the 3.2 percent deficit forecast for that year by the government last October.
The Treasury said that while the overall debt burden remained moderate, the size of the deficit meant debt service costs were rising faster than any other category of spending.
The government’s borrowing requirement was projected to rise to 148.7 billion rand by 2013/14 from 141 billion rand in 2010/11. Net debt would peak at 1.4 trillion rand or 39.3 percent of GDP by 2013/14, against 999 billion rand in 2011/12.

The Treasury on Wednesday shaved its economic growth forecast for calendar 2011 to 3.4 percent from 3.5 percent projected last October — below levels necessary to reduce chronic unemployment.
Gordhan said strong commodity prices, low interest rates and faster global growth had been the main forces behind recovery in Africa’s biggest economy, with growth projected at 4.1 percent in 2012 and 4.4 percent in 2013. Latest official estimates suggest the economy grew 2.8 percent last year, gradually emerging from its first recession in nearly two decades.
Annual inflation, at 3.7 percent in January, is likely to move toward the upper end of a 3-6 percent target range by 2013 as growth accelerates, the Treasury predicted.
But employment growth has been lagging, and with official unemployment at 25 percent, the ANC is pouring billions of dollars into job promotion schemes.
Besides 39 billion rand already earmarked for job creation and manufacturing investment, Gordhan said the government would spend an extra 5 billion rand on a youth employment subsidy to get school-leavers and graduates into work.
“We cannot view the fact that 42 percent of young people between the ages of 18 and 29 are unemployed as merely a statistic,” Gordhan said.

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