Johannesburg — THE Treasury has moved to dispel fears that SA's budget deficit will balloon more than expected this year as the recession bites, amid warnings that it could reach 8% of gross domestic product (GDP).

News on Friday that revenue fell 10% versus the same period last year, while spending surged 32,4%, prompted the warnings.

But the Treasury's budget head, Kuben Naidoo, told Business Day yesterday the main reason for the leap in spending was the timing of planned transfers to infrastructure projects, including the Gautrain and universities and technikons.

He said the government was sticking to its forecast last month that tax revenue in 2009-10 may undershoot its target by R40bn- R60bn, as the economy's downturn erodes corporate profits, personal income, and consumer spending.

"It will probably be closer to R60bn, which would imply a higher deficit although it is too early in the year to make an accurate call."

Naidoo said that would boost the budget deficit estimated in February for this fiscal year to R155bn from R95bn. "My maths says that is exactly 6% of GDP."

The Treasury has not officially revised its forecast for the deficit to widen to 3,9% of GDP this year as it ramps up spending on infrastructure and social services in the face of shrinking economic output.

SA's finances slipped back into the red in fiscal 2008-09 with a deficit of 1% of GDP, after recording small but historic surpluses in fiscal 2006-07 and 2007-08.

Treasury data on Friday showed that in the first three months of this fiscal year, which began in April, revenue amounted to R122,3bn, down from R135,9bn at the same time last year. Spending leaped to R180,1bn from R135,9bn.

Nomura emerging markets analyst Peter Attard Montalto said he was disturbed by the trend and would revise his forecast for SA's budget deficit this year up to 7,5% of GDP from 6,5% earlier.

"Markets can tolerate a deficit when expenditure is kept under control, but this is not the case in SA." With revenue unlikely to improve before the start of 2010, the government had to curb spending, which was unlikely given the present political climate, he said. "In our view, the market is only just coming around to worrying about SA's fiscal stance".

Absa Capital Research head Jeff Gable had similar concerns.

"Our current estimate is that the revenue shortfall will be something like R64bn this year overall. We would project something like a deficit of 8% of GDP for this year."

Naidoo said the government "didn't expect a major problem on the spending side this year", despite uncertainty about the outcome of public service salary negotiations.

Municipal workers got a 13% pay hike after their strike last week, creating a costly benchmark for public sector salaries, which make up a third of government spending.

On the revenue side, value added tax income has plunged this year as consumer spending falls, while corporate tax is slowing.

"We expect corporate income to come under pressure from the lagged impact of the recession on company profits," Naidoo said.

He said larger official weekly bond issuance was natural given this year's higher deficit.

Naidoo also said the government was not considering tapping a "sterilisation deposit" it holds at the Reserve Bank to limit pressure on public borrowing. Analysts say the fund, which is worth more than R70bn, could be tapped to save the cost created by new official debt instruments.