SA to retreat into deficit in 2009 as commodities soften
Thématique :
sud afrique
South Africa’s two successive years of fiscal surplus would come to an abrupt end during the 2009/10 fiscal period, the Medium Term Budget Policy Statement (MTBPS) released by the National Treasury on Tuesday revealed. However, government signalled a possible return to a balanced Budget in 2011/12, should the global economy and commodity prices recover by that time.
The Budget balance for 2008/9 had been revised to a surplus of only 0,1% of gross domestic product (GDP), or R3,2-billion, from an initial estimate of 0,8% of GDP. In fact, until the release of the MTBPS, the Treasury had officially been forecasting continued modest surpluses of between 0,6% and 0,8% for the three-year period covered by the MTBPS.
This revised surplus of R3,2-billion also fell well short of the surplus of R26,6-billion, or 1,3% of GDP in 2007/8. And, as the economy slowed further next year, the Budget balance was anticipated to move into a deficit of 1,6% of GDP, or a monetary deficit of R41,5-billion.
For 2010/11, the deficit should narrow slightly to 1,1% of GDP, or R31-billion, before possibly moving into a balanced position in 2011/12.
The MTBPS 2008, which was released along with Finance Minister Trevor Manuel’s speech to Parliament, was still estimating positive (GDP) growth of 3,7% for the current year, but indicated a deceleration to 3% in 2009. It also forecast growth of 4% for 2010 and a modest recovery to 4,3% in 2011 – the 3,7% was also a downward revision from the February Budget forecast of 4%.
The shift in the Budget’s balance from surplus to deficit was attributed to weaker economic activity and slower growth, which would translate into a moderation of tax revenue growth. It would also leave far less so-called “fiscal space”, which many of the ruling African National Congress’ left-leaning allies were hoping to exploit post the 2009 elections.
But the key swing factor highlighted was that the so-called “cyclical component” of revenue, which Treasury said related to a fall in commodity prices as a result of slowing international growth.
Given the resources intensity of the South African economy, its economic cycle was viewed as being strongly tied to the fortunes of commodity prices. When commodity prices were high, South Africa’s export earnings rose and the economy experienced a “positive wealth effect”, which also fed through into tax revenue. But the Treasury considered such revenue to be cyclical because it did not result from a structural change in the economy and could be expected to unwind as relative prices adjusted.
Compounding matters this year, though, was the fact that mining companies had faced a number of production challenges, particularly related to the fact that mines had been rationed to 90% of their previous electricity consumption as power utility Eskom struggled to keep pace with demand.
“Some recovery was seen in the second quarter, but total production was still 8,8% lower in the first eight months compared with the same period in 2007. Mining export volumes stagnated in the first half of the year, but export earnings between January and August were 33,7% higher compared with 2007 due to higher commodity prices,” the MTBPS asserted.
Overall, revenue growth had averaged 17% a year over the past four years, but it had slowed in the first six months of 2008/9 and the Budget framework, therefore, modelled a moderation in revenue growth over the next two years in line with corporate profitability.
“Following the buoyancy of recent years, a reduction of gross tax revenue as a percentage of GDP is projected. Much of this decline represents a natural reduction in the cyclical component of revenue, as economic growth and commodity prices retreat from relatively high previous levels,” the statement explained.
Still, revenue collection remained strong, with the audited main Budget revenue outcome of R559,8-billion for 2007/8 coming in R15,2-billion higher than the original budget estimate in February 2007 and R1,8-billion higher than the revised 2008 Budget Review estimate.
The Treasury also said that, based on revised macroeconomic projections, as well as the revenue trends for the first six months of this fiscal year, Budget revenue for 2008/9 was expected to amount to R626,5-billion, or R1,2-billion higher than the February estimate.
It expected revenue to rise to R682,9-billion in 2009/10, to R751,1-billion in 2010/11 and R833,4-billion in 2011/12.
But the government was also committed to increasing its expenditure, with the medium-term expenditure framework allocating R678,2-billion across the three spheres of government in 2009/10. This would increase to R767,9-billion by 2011/12.
The Budget balance for 2008/9 had been revised to a surplus of only 0,1% of gross domestic product (GDP), or R3,2-billion, from an initial estimate of 0,8% of GDP. In fact, until the release of the MTBPS, the Treasury had officially been forecasting continued modest surpluses of between 0,6% and 0,8% for the three-year period covered by the MTBPS.
This revised surplus of R3,2-billion also fell well short of the surplus of R26,6-billion, or 1,3% of GDP in 2007/8. And, as the economy slowed further next year, the Budget balance was anticipated to move into a deficit of 1,6% of GDP, or a monetary deficit of R41,5-billion.
For 2010/11, the deficit should narrow slightly to 1,1% of GDP, or R31-billion, before possibly moving into a balanced position in 2011/12.
The MTBPS 2008, which was released along with Finance Minister Trevor Manuel’s speech to Parliament, was still estimating positive (GDP) growth of 3,7% for the current year, but indicated a deceleration to 3% in 2009. It also forecast growth of 4% for 2010 and a modest recovery to 4,3% in 2011 – the 3,7% was also a downward revision from the February Budget forecast of 4%.
The shift in the Budget’s balance from surplus to deficit was attributed to weaker economic activity and slower growth, which would translate into a moderation of tax revenue growth. It would also leave far less so-called “fiscal space”, which many of the ruling African National Congress’ left-leaning allies were hoping to exploit post the 2009 elections.
But the key swing factor highlighted was that the so-called “cyclical component” of revenue, which Treasury said related to a fall in commodity prices as a result of slowing international growth.
Given the resources intensity of the South African economy, its economic cycle was viewed as being strongly tied to the fortunes of commodity prices. When commodity prices were high, South Africa’s export earnings rose and the economy experienced a “positive wealth effect”, which also fed through into tax revenue. But the Treasury considered such revenue to be cyclical because it did not result from a structural change in the economy and could be expected to unwind as relative prices adjusted.
Compounding matters this year, though, was the fact that mining companies had faced a number of production challenges, particularly related to the fact that mines had been rationed to 90% of their previous electricity consumption as power utility Eskom struggled to keep pace with demand.
“Some recovery was seen in the second quarter, but total production was still 8,8% lower in the first eight months compared with the same period in 2007. Mining export volumes stagnated in the first half of the year, but export earnings between January and August were 33,7% higher compared with 2007 due to higher commodity prices,” the MTBPS asserted.
Overall, revenue growth had averaged 17% a year over the past four years, but it had slowed in the first six months of 2008/9 and the Budget framework, therefore, modelled a moderation in revenue growth over the next two years in line with corporate profitability.
“Following the buoyancy of recent years, a reduction of gross tax revenue as a percentage of GDP is projected. Much of this decline represents a natural reduction in the cyclical component of revenue, as economic growth and commodity prices retreat from relatively high previous levels,” the statement explained.
Still, revenue collection remained strong, with the audited main Budget revenue outcome of R559,8-billion for 2007/8 coming in R15,2-billion higher than the original budget estimate in February 2007 and R1,8-billion higher than the revised 2008 Budget Review estimate.
The Treasury also said that, based on revised macroeconomic projections, as well as the revenue trends for the first six months of this fiscal year, Budget revenue for 2008/9 was expected to amount to R626,5-billion, or R1,2-billion higher than the February estimate.
It expected revenue to rise to R682,9-billion in 2009/10, to R751,1-billion in 2010/11 and R833,4-billion in 2011/12.
But the government was also committed to increasing its expenditure, with the medium-term expenditure framework allocating R678,2-billion across the three spheres of government in 2009/10. This would increase to R767,9-billion by 2011/12.
