Treasury: Tough decisions were made to avoid debt trap
Raising tax revenue was an essential priority
Despite a more positive budget, South Africa will remain in a debt trap without meaningful growth.
“We need growth to get out of this trap and that’s not been the case,” said BNP Paribas economist Jeff Schultz.
While the Treasury has revised the growth forecasts up in the medium term, it remains paltry. Growth is expected to lift to 1% in 2017, up to 2.1% by 2020.
South Africa has strayed from the goals set out in the National Development Plan for economic growth of 5.4% per year and a 6% decrease in unemployment by 2030.
The consolidated deficit is expected to narrow from 4.3% of GDP in 2017/18 to 3.5% of GDP in 2020/21. The Treasury added confidently that the main budget primary deficit will close over the medium term, helping to stabilise the gross debt to GDP to 56.2% of GDP in 2022/23.Despite being lower than previously anticipated, it’s still a huge jump from 27.8% in 2008.
“The increased investor and business confidence needs to keep gaining momentum. The worry is that it fizzles out by 2019,” says Schultz.
Finance Minister Malusi Gigaba admitted that tough decisions had to be taken after the medium term budget policy statement in October last year painted a bleak picture.
The tax measures, importantly the one percentage point increase in VAT to 15%, are expected to raise an additional R36-billion in tax revenue.
Deputy Finance Minister Sfiso Buthelezi said: “If we didn’t take these decisions, we would have accelerated to a fiscal cliff and landed up in a debt trap. Investments would have run away from this country and it would have become more costly to service this debt.”
The budget statement marked a return to fiscal consolidation after criticism from credit rating agencies following the medium budget policy statement in October.
The abandonment of fiscal consolidation as a key policy anchor in the October 2017 medium term budget policy statement led to the downgrade to sub investment grade by S&P and the credit watch by Moody’s.According to Capital Economics economist John Ashbourne, the budget suggests that President Cyril Ramaphosa is putting a renewed emphasis on narrowing the fiscal deficit.
“We think that the shortfall will narrow in the short term, but that the government’s longer-term outlook is too rosy,” he said.
He added that while growth may be stronger, the deficit is expected to widen rather than narrow at the end of the Treasury’s forecast period.
“We don’t think that the long-term deficit will be meaningfully reduced without much faster growth,” he said.
Gigaba explained that the government’s fiscal interventions also demand greater efficiency in the use of funds across the public sector. The state recognised the need to shift spending away from consumption towards higher investment, he said.
The expenditure ceiling has been revised down marginally from what was presented in October. However, the small revisions are underpinned by large reductions and reallocations.