SA Finance Minister outlines plans to reduce spending
October 22, 2014, 4:44 pm

Finance Minister Nhlanhla Nene makes his first policy statement in Cape Town, South Africa on 22 October 2014 [TBP]

“Governments everywhere face difficult choices because the gap between what is required and what can be afforded is very wide. And so we have to be steadfast in our resolve to do more, together, with less,” Nene said.

To bridge that gap Nene outlined plans to reduce spending and increase taxes. That would mean that government lowers its expenditure ceiling by R25 billion over the next two years, while also introducing tax proposals in the February 2015 Budget that would generate additional revenue of at least R27 billion.

The result is that the fiscal deficit to gross domestic product (GDP) would come down from the actual 3.9% in fiscal year 2013/14 and the expected 4.1% in 2014/15 to 3.6% in 2015/16, 2.6% in 2016/17 and 2.5% in 2017/18.

In his last Budget presented in February, former Finance Minister Pravin Gordhan reduced the government’s real gross domestic product (GDP) growth forecast to 2.7% in 2014 from the 3.0% forecast in the 2013 MTBPS, which was markedly better than the actual increase of 1.9% in 2013. He also raised the GDP forecast to increase from 2.7% in 2014 to 3.4% in 2016.

“To make more rapid progress in creating jobs and reducing poverty, we have to grow our economy at 5% a year or more,” said Gordhan said at the time.

A crippling five-month strike in the platinum mining industry in the first half of the year and a one-month strike by metal workers in July has meant that the International Monetary Fund (IMF) is now only forecasting a growth rate of 1.4% this year instead of the 2.3% forecast in April. The 1.4% growth rate is also that forecast by Treasury, rising to 2.5% in 2015, 2.8% in 2016 and 3.0% in 2017.

Growth has slowed from 2.5% in 2012 and 3.6% in 2011 according to Statistics South Africa data released on February 25. In his briefing to the media before the Budget speech, Gordhan said that the lack of an increase in electricity generation capacity had been a constraint on growth and further delays to the new build programme were a major risk factor.

The Medupi power station was originally scheduled to connect to the national grid with the first of six 800 Megawatt units in 2011, but this is now only likely later this year. State-owned electricity utility Eskom in February declared two national power emergencies as forecast peak demand was below available capacity. Current available capacity is of the order of 32 000 Megawatts, while peak winter demand is normally above 37 000 Megawatts. In 2012 and 2013 Eskom managed that 5 000 Megawatt gap by reducing planned maintenance in winter and by buying back power from ferrochrome producers. On 6 March 2014, Eskom implemented the first nation-wide load-shedding since 2008. As yet there have been no announced power backs this year, which is why the system is already so constrained in a summer month.

Reaction from economists was that Nene managed the fine balancing act with aplomb, but they would reserve judgment until after the February 2015 Budget was tabled, as that would detail the new tax increases and how that would impact growth.

“I think it is generally encouraging. Maybe not yet the ‘turning point’ that it claims to be, but very encouraging signals given the economic and political constraints,” economist Elna Moolman from Macquarie Securities said.

The two main challenges outlined in the MTBPS was the poor private sector fixed investment and the lack of capacity in the government to implement grand plans.

The ruling African National Congress has vowed to create 6 million jobs in the next five years.

The 209 000 new jobs created by the youth tax employment incentive scheme in the first eight months of this year showed that where the government created an enabling environment, the private sector would step up to the plate and contribute its fair share. That bodes well for the future.

Helmo Preuss in Cape Town, South Africa for The BRICS Post