A good start

Finance Minister Pravin Gordhan's first Medium-Term Budget Policy Statement is a good start. Here are a few highlights:

At consolidated level, the 2009/10 budget deficit increases sharply due to lower tax revenue and higher spending. Revenue undershot by R70 billion relative to the forecast presented in the 2009 Budget. Not surprisingly, the big disappointments include
a) sharply lower company tax receipts;
b) lower VAT take; and
c) falling customs and excise revenue.

While tax receipts undershot, expenditure overshot by around R7bn compared with the February 2009 estimate. Higher expenditure mainly reflects a larger wage bill (in turn, the result of higher than anticipated inflation). Expressed as percentage of gross domestic product, the 2009/10 deficit jumps from 3.8% initially to 7.6%.

National Treasury acknowledges the importance of "leaning against the wind". As the economy recovers, tax revenue is projected to improve which, combined with slower growth in spending, should see the deficit shrink over time (estimated to narrow from 7.6% to 4.2% in 2012/13).

Smaller budget deficits over the next three years are based on the following longer term trends:

Growth in tax revenue is budgeted to exceed growth in nominal GDP. This can only occur if the tax base expands, tax administration improves even more and/or new taxes are introduced (for example, a new environmental tax is mooted). Against this backdrop, revenue to GDP ratio is projected to climb to almost 30% in 2012/13 from 27.3% in 2009/10.

By contrast, government spending to GDP ratio comes down from a record high of 35% in 2009/10 to 33.8% in 2012/13, as growth in expenditure slows to below nominal GDP growth. Viewed differently, spending is projected to expand by only around 1% in real terms out to 2012/13 versus growth of around 9% over the past three years.

As National Treasury remains committed to fiscal discipline, and not being able to raise spending much further, its focus shifts to improving the quality of expenditure, reducing waste and inefficient spending, and re-prioritising away from non-core to priority areas such as education, health, rural development, and fighting crime and corruption.

Even though the deficit is forecast to decline over time, government debt to GDP ratio obviously continues to rise (from an estimated 29% in 2009/10 to around 40% in 2012/13). This represents a trend reversal from before, when paying back debt was the norm. Higher debt levels is an unfortunate byproduct of the recession, not only here but worldwide. Still, even this higher debt/GDP ratio compares favourably with other Emerging Market countries and at the same time remains below the 50% cap that the government set itself in the February 2009 Budget.

The government's commitment to contain borrowing over the longer term is also clear in the acknowledgement that if deficits are not reduced, it would mean an ever rising debt service burden i.e. a higher proportion of public expenditure would go towards interest payments at the expense of social and economic priorities. Alternatively, the government would have to raise taxes to meet rising interest costs (obviously not ideal).

Similarly, it is pleasing that the minister acknowledges that a permanent increase in the wage bill cannot be funded through borrowings. Simply put, if wage inflation does not moderate, it means tax rates would have to go up or spending elsewhere would have to be cut (once again, not an ideal outcome).

Other encouraging snippets:

It would seem that National Treasury prefers excon relaxation and continued reserve purchases as the more appropriate ways to stem rand strength. This is positive news in light of the current rand debate.

The only way National Treasury sees South Africa being able to create jobs over the long term is through

a) improving the country's competitiveness;
b) even higher fixed investment;
c) creating space for the private sector to actively participate;
d) adhering to sound fiscal policy;
e) implementing productivity enhancing measures, and importantly;
f) through the continued pursuit of lower inflation (the Reserve Bank should be glad to hear this).

All told, a good-news MTBPS in which the minister has said all the right things. Admittedly, higher debt/GDP levels are here to stay, but then again, commitment on the part of the government to contain growth in borrowings should keep investors and rating agencies relatively happy.