No time to cut state spending despite rising budget deficit
July 2, 2009
By Donwald Pressly
The gap between state spending and revenue is widening rapidly, according to the latest Treasury figures for May, but economists agree that the government should not cut spending now even though a growing budget deficit will put pressure on long-term interest rates.
Nedbank economist Carmen Altenkirch said yesterday that government spending should not be reined back until the recession ended.
Mike Schussler, the joint head of Economists.co.za, said the government needed "to pick up some of the slack in the economy" and the budget deficit would probably grow to 5 percent by year-end.
Altenkirch put the deficit at 5.1 percent if the economy contracted 2 percent this year.
Finance Minister Pravin Gordhan told Parliament yesterday that revenue this year was R19 billion below the Treasury's target and could be R60bn behind by year-end - but cutting spending now "will add to the weakness in the economy" and hit the poor.
The accountant-general reported revenue at R32bn in May, down from R36bn last May. Spending was at R52bn compared with R48bn a year earlier.
Expenditure for the fiscal year to date was R114bn compared with just R89bn last year.
Assuming spending levels remained as budgeted, Gordhan said, the deficit would be higher than forecast in February, when the Treasury had put it at 3.9 percent of gross domestic product (GDP).
Gordhan told MPs that it was "too early to make a reliable prediction of the fiscal outcome, but it is already clear that spending will substantially exceed our revenue this year".
Owing to South Africa's low debt to GDP ratio, "we can afford to maintain our present spending level and increase our borrowings", he said in his first Treasury budget vote.
Reducing unemployment and poverty was likely to be much harder in the period ahead and the social wage to poor households had to continue expanding, Gordhan said.
Schussler said: "We'll struggle to come in under a 5 percent deficit. We will have to borrow more, and that will push long-term interest rates up. That is a concern when we are putting big capital projects in place."
The debt to GDP level below 30 percent was generally lower than the industrialised world.
Altenkirch said that with revenue turning out "much weaker" than forecast, there would be pressure on the government to borrow.
She predicted that the average value of bonds sold at domestic auctions would rise to about R1.85bn, up from R800 million last year and the R1.4bn currently sold.
Cope finance spokesman Nic Koornhof said the budget deficit could rise to 6 percent. This could mean sharp hikes in tax or cutbacks in spending.
Gordhan said the government's view was that the economic recovery would start later this year, "but it will be a slow, gradual recovery, with employment growth lagging the economic recovery".
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