5 September 2008
editorial
Johannesburg — IT SHOULDN'T come as too much of a surprise that the budget surplus that Finance Minister Trevor Manuel had pencilled in for the next fiscal year is no longer expected to materialise.
Though the treasury will not confirm it, Manuel, it seems, has informally made it clear to Cosatu and to provincial finance chiefs that there will be no surplus and they shouldn't brandish the begging bowls ahead of October's medium-term budget. But that's something they could have worked out for themselves, had they but done the numbers.
Manuel budgeted for a fairly small surplus of R11,2bn, or 0,5% of gross domestic product, next year. That's after the allocation of a R12bn contingency reserve, most of which was destined to cover transfers to Eskom in terms of the treasury's commitment to put R60bn into Eskom over five years. However, the government decided a couple of months ago to speed up those transfers, paying over R30bn next year. That will use up the reserve and wipe out the projected surplus.
But there's more. Manuel had assumed that the economy would grow next year by 4,2%. It's now clear that growth will be a lot slower than that -- the consensus forecast in the market is 3,2% -- and that's likely to mean revenue collections will fall short. The minister had assumed too that next year's inflation rate would be 4,8%. We wish.
Chances are it will average over 7%, and that will mean the public sector wage bill will be a lot higher than budgeted for, because the agreement with the trade unions ties annual pay increases to inflation. And there will doubtless be a couple of other extra items of expenditure that are non-negotiable: on the Soccer World Cup, for example.
So it's fairly obvious there will be no surplus next year (and indeed, even the 0,6% surplus budgeted for this year must be at risk). The only question is how large the deficit will be. In absolute money terms, there's really not much difference between a small surplus and a small deficit. In that sense, there's no reason why the market should be particularly exercised about the shift in the fiscal balance from black to red.
A modest deficit, if that's what it's going to be, doesn't mean a retreat from fiscal prudence, especially in a year in which economic growth will be below par.
But a surplus and a deficit send very different signals. And in the current political environment that may actually be a good thing. As long as there is a surplus, there will be populist pressure to spend more. And ministers themselves must have eyed the few surplus billions of the past couple of years and wondered why they couldn't get more money for their own pet projects. Going into next year's elections, the danger would be that all sorts of wild promises might be made.
But the prospect of a deficit should help to impose at least some discipline, reminding politicians that there are constraints on how much government can prudently and sustainably spend.
Those constraints are more serious than ever, as are the concerns that originally prompted Manuel to go the surplus route. SA does not have enough savings to finance its investment and government dissaving will only make the current account deficit worse and make SA more dependent on fickle foreign investment. So caution remains crucial.
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It is my conclusion that we will see a relatively small surplus in 2013 and probably again in 2017.