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A well balanced Budget

Finance Minister Pravin Gordhan delivered his third Budget Speech on 22 February 2012. The Minister presented a well balanced Budget, giving attention to social services (health, education and social protection), infrastructure, employment creation, business incentives, service delivery and corruption. The 2012 Budget will go down in history as the first to exceed R1 trillion.

The Minister highlighted that uncertainty continues to plague the global economy due to the ongoing economic problems in the Euro zone, and Greece in particular. South Africa is expected to grow by only 2.7% in 2012 and 3.6% in 2013. This is a far cry from the 6% - 7% growth rate often cited as a necessary condition for real progress to be made in addressing the triple challenge of poverty, inequality and unemployment.

It is important to note that the low economic growth in South Africa is only in part a result of the global environment. Many of the bottlenecks including inadequate infrastructure, a low level of household savings, and regulatory red tape are driven domestically. There is acknowledgement of this fact within government and several measures to address these challenges are being introduced through the Budget. For example, the introduction of tax-exempt savings products is being considered and from March 2012 the number of tax returns and payments for micro businesses will be reduced from 18 to two.

The budget deficit is projected at 4.6% of Gross Domestic Product (GDP) in 2012/13. This is lower than the 5.2% that was contained in the Medium Term Budget Policy Statement (MTBPS) released in October. A main reason for this is that tax collection has been better than expected due to the recovery in employment in the second half of 2011 and good performance by the corporate sector. The lower deficit may positively contribute to South Africa’s credit rating outlook which was recently changed to negative by two international credit rating agencies.

The deficit is expected to drop further to 3% of GDP by 2014/15. This forecast could be overly optimistic given that it is based on the premise that the public sector wage bill will grow at a significantly lower rate than in previous years. At the same time, GDP growth might not reach 4.2% in 2014/15 as forecasted. However, proposed measures to strengthen financial management such as more proactive monitoring of expenditure and the loss of funding allocations in the event of mis-spending bode well for deficit reduction.

Although the Budget placed strong emphasis on infrastructure development, public sector spending on infrastructure as a percentage of GDP will be less than in 2010/11. Furthermore, by 2014/15 this percentage will be less than in 2012/13. This raises doubts over the ambitious infrastructure programme described by the President in the State of the Nation Address. Given that infrastructure is a key enabler for economic activity, higher, not lower, public expenditure would be appropriate for better job creation and GDP growth outcomes. The difficulty of balancing spending on social and economic services, while trying to reduce the deficit is captured in this downward trend in infrastructure spending.

A large number of commentators have said that the most critical factor for the 2012 Budget is effective implementation. This point cannot be over-emphasised. Overall, the 2012 Budget is good and provides a framework for continued economic recovery over the medium term. The extent to which the aspirations of South Africa will be attained strongly depends on the ability of public entities including local governments, municipalities and SOEs to deliver. The invitation extended by government to work more closely with business is welcome, as are initiatives to strengthen capacity in the public sector.

Last updated 12 February 2013 14:04


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About Momentum > News from Momentum > Articles and Comment

A well balanced Budget

Finance Minister Pravin Gordhan delivered his third Budget Speech on 22 February 2012. The Minister presented a well balanced Budget, giving attention to social services (health, education and social protection), infrastructure, employment creation, business incentives, service delivery and corruption. The 2012 Budget will go down in history as the first to exceed R1 trillion.

The Minister highlighted that uncertainty continues to plague the global economy due to the ongoing economic problems in the Euro zone, and Greece in particular. South Africa is expected to grow by only 2.7% in 2012 and 3.6% in 2013. This is a far cry from the 6% - 7% growth rate often cited as a necessary condition for real progress to be made in addressing the triple challenge of poverty, inequality and unemployment.

It is important to note that the low economic growth in South Africa is only in part a result of the global environment. Many of the bottlenecks including inadequate infrastructure, a low level of household savings, and regulatory red tape are driven domestically. There is acknowledgement of this fact within government and several measures to address these challenges are being introduced through the Budget. For example, the introduction of tax-exempt savings products is being considered and from March 2012 the number of tax returns and payments for micro businesses will be reduced from 18 to two.

The budget deficit is projected at 4.6% of Gross Domestic Product (GDP) in 2012/13. This is lower than the 5.2% that was contained in the Medium Term Budget Policy Statement (MTBPS) released in October. A main reason for this is that tax collection has been better than expected due to the recovery in employment in the second half of 2011 and good performance by the corporate sector. The lower deficit may positively contribute to South Africa’s credit rating outlook which was recently changed to negative by two international credit rating agencies.

The deficit is expected to drop further to 3% of GDP by 2014/15. This forecast could be overly optimistic given that it is based on the premise that the public sector wage bill will grow at a significantly lower rate than in previous years. At the same time, GDP growth might not reach 4.2% in 2014/15 as forecasted. However, proposed measures to strengthen financial management such as more proactive monitoring of expenditure and the loss of funding allocations in the event of mis-spending bode well for deficit reduction.

Although the Budget placed strong emphasis on infrastructure development, public sector spending on infrastructure as a percentage of GDP will be less than in 2010/11. Furthermore, by 2014/15 this percentage will be less than in 2012/13. This raises doubts over the ambitious infrastructure programme described by the President in the State of the Nation Address. Given that infrastructure is a key enabler for economic activity, higher, not lower, public expenditure would be appropriate for better job creation and GDP growth outcomes. The difficulty of balancing spending on social and economic services, while trying to reduce the deficit is captured in this downward trend in infrastructure spending.

A large number of commentators have said that the most critical factor for the 2012 Budget is effective implementation. This point cannot be over-emphasised. Overall, the 2012 Budget is good and provides a framework for continued economic recovery over the medium term. The extent to which the aspirations of South Africa will be attained strongly depends on the ability of public entities including local governments, municipalities and SOEs to deliver. The invitation extended by government to work more closely with business is welcome, as are initiatives to strengthen capacity in the public sector.

Last updated 12 February 2013 14:04


Join the discussion  Twitter Facebook