25 Feb 2013
SA’s main budget deficit shrunk from -7.3 percent of GDP in 1993/94 to a surplus of 0.7 percent of GDP in 2007/08.
Consequently, its sovereign debt rating from Moody’s moved from Baa3 in 1994, to A3 which allowed South Africa’s 2012 inclusion in Citi Bank’s WGBI (World Government Bond Index), says Annabel Bishop, chief economist at Investec.
Bishop says with economic growth weak, the consolidated deficit remained large in 2011/2012, at -4.2 percent of GDP, and government proposed in October 2012 that it would widen to -4.8 percent of GDP in 2012/13, and not reach -3.0 percent of GDP before 2015/16 (fiscal consolidation to be extended by a year).
“This fiscal slippage, along with a number of other concerns, then prompted Moody’s, Standard and Poor’s and Fitch to downgrade SA at the end of 2012 and early in 2013,” she says.
She points out that Moody’s also highlighted a fractious domestic environment in its rationale for its downgrade, S&P said underlying social tensions could result in amplified pressure on Government spending in a weaker business and investment environment, and Fitch highlighted a deteriorating growth performance which could affect public finances and exacerbate social and political tensions.
Fitch believes the country’s public finances have deteriorated and the other agencies also expressed concern.
According to Bishop, the last set of government finance projections (in the Medium-Term Budget Policy Statement, MTBPS, of October 2012) shows the budget deficit is only projected to drop to 3.0 percent of GDP by 2015/16 (previously the consolidation was projected for 2014/15), and the primary balance approach 0% in 2015/16 (versus 2014/15 in the previous projections).
“The 2013 Budget is likely to show similar fiscal deficit ratio projections to those of the 2012 MTBPS and we do not expect any projected fiscal slippage (extension of the time period proposed for bringing the deficit back to 3.0 percent of GDP).
2012/13 fiscal deficit will likely come out at 4.7 percent of GDP, if not below, she notes.
However, says Bishop, should further fiscal slippage occur instead (the 2013 Budget show an extension of the time period proposed for bringing the deficit back to 3.0 percent of GDP and the forecast deficit for 2015/16 rise considerably above 3.1 percent GDP), SA will likely receive further rating downgrades and the cost of borrowing will rise.
Bishop points out that the years of exceptional prosperity from 1999 to the recession (the longest period of expansion in SA’s history) will not return in the next five years.
Tax revenue for 2012/13 was revised down by R5 billion in October 2012’s MTBPS thus widening the budget deficit.
She notes that in the State of the Nation Address President Jacob Zuma said: “ensuring that the public services we provide our people today can continue to be provided to our people tomorrow, requires that we have suitable tax policies to generate sufficient revenue to pay for these services.”
Furthermore, Zuma said: “from time to time, we have commissioned studies into our tax policies, to evaluate the extent to which they meet the requirements of the fiscus.”
In particular, he said “later this year, the Minister of Finance will be commissioning a study of our current tax policies, to make sure that we have an appropriate revenue base to support public spending.”
“We believe this implies higher future taxes for higher income earners (potentially from as early as 2014), in line with government’s redistributive income policy for South Africa.”
Since government absorbs more of the economy’s output via higher taxation, economic growth will not rise if government is not as productive as the private sector, and economic growth would then likely slow instead, she notes.
Bishop points to crowding out investment in the private sector - by taking more of the private sector’s profits (via increased taxation), when these profits could have been reinvested in the private sector instead and so used to create more jobs, will clearly reduce economic growth and productivity.
Bishop points out that Government expects the number of individuals receiving social welfare monetary grants will rise to 16.8 million in 2014/15, with 11.7 million children, which will likely entrench the culture of dependency created by the social services.
“This dependency extends further, with the total cost of the social wage (grants, education, health and housing and community amenities) accounting for 57 percent of government spend (R615.7billion).
What’s more, South Africa’s ratings are among the worst in the world on the quality of state provided education, health and the costs of crime (The 2012 Global Competitiveness Report, WEC) while its expenditure on education is the highest among emerging markets, corruption is one of the key deterrents to doing business in South Africa and is impeding service delivery along with inefficient bureaucracy.
She says this indicates that spending more money on service delivery and increasing civil servants wages, will not solve the problems in service delivery, but rather exacerbate it instead.
SA should instead follow the current path of the Nordic countries' highly successful service delivery, she adds. – Denise Mhlanga
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