Minister Pravin Gordhan in previous budgets put in place a counter-cyclical strategy to support South Africa due to the impacts of the global financial crises. The recovery in the South African economy has not been as robust as anticipated raising significant challenges. Our economic growth is sluggish and non-interest spending is declining, painting a worrying picture going forward.

Economic Growth

South Africa’s economic growth is more like the developed world, than emerging economies, according to the MTBPS. South Africa is thus projected to underperform in comparison to its peers in other emerging economies and lags behind developing Asia. The choices made by government in the MTBPS will unfortunately continue this trajectory.

Nonetheless, economic growth of 4% should not be dismissed as irrelevant. It may be a useful start to propel economic growth to the 6-7% widely seen as a requirement for successfully bringing down the high levels of unemployment in South Africa.
At the same time, government has ambitious spending plans in place. These plans potentially provide for a massive investment in social spending and investments in economic inclusion that over the next decade. The proverbial tight rope act follows. On the one hand, the economy is not growing as rapidly as we hope and as a consequence revenue is likely to decline. On the other hand, South Africans have woken up the reality that programmes such as the National Health Insurance and the Community Works Programme are needed to expand opportunities to all South Africans. The National Treasury argues that it:

presents a fiscal framework that is supportive of the economy over the medium term, while strengthening interventions aimed at boosting
sustainable long-term growth. The budget deficit widens in the current year owing to lower-than-anticipated revenue. Moderation in spending,  together with improving revenue performance, will reinforce the fiscal position over the next three years. It is expected that debt-service costs will stabilise as a percentage of GDP by 2014/15.

Non-Interest spending will decline as a % of GDP

The decline in non-interest spending as a percentage of GDP will have a significant impact on future plans. The decline is sharp as a percentage of GDP.

Year	2009/10	2010/11	2011/12	2012/13	2013/14	2014/15
Non-interest spending as a % of GDP	31.5	29.8	30.3	29.5	28.9	28.1

Non-interest spending falls over this period, primarily due to the higher costs of financing the debt that has been undertaken over the last few years. The table below shows the percentage change year-on-year comparing state debt cost with non-interest spending.
Percentage change in state debt cost and non-interest spending

Year	2011	2012	2013	2014	2015
State Debt Cost	15.9	16.2	15.9	16.8	10.6
Non-Interest Spending	6.5	10.0	7.9	8.2	7.5

In percentage terms, state debt cost will grow more quickly than non-interest spending. The implication is stark as we must protect non-interest spending over the long term to have any prospect of meeting our developmental goals.  Minister Gordhan notes in his MTBPS speech that:

As a consequence of the wider budget deficit since 2008, state debt cost is the fastest growing category of spending, increasing to R 115 billion in 2014/15, or just under 10 per cent of the total.

Looking ahead

The National Treasury have identified several strategies to manage escalating debt and meet the demands of future social and economic spending. The strategies are:
 

1. Policy Reserve – Introduced during Budget 2011, the policy reserve aims to first create space for spending, and then direct spending carefully to the areas that provide the best return. Minister Gordhan has indicated that this process  will guide the process of making choices for Budget 2012.
2. Fiscal Guidelines – Whilst there has not been a process to formalise the Fiscal Guidelines, Minister Gordhan makes reference to them extensively in his speech. (Link Here). The process seeks to continue a counter-cyclical fiscal stance, ensure debt sustainability and ensure inter-generational equity. This will be supplemented with long term outlook on public finances.
3. Estimating public service salary costs – The National Treasury have estimated salary increases in the public service linked to inflation (around 5%). It remains unclear whether this will be realisable in practice.
4. Cut wasteful expenditure – Minister Gordhan has argued consistently for cutting out wasteful expenditure. He proposes that the process continues and the MTBPS outlines ways of savings. The central problem is that government has not been aggressive enough in cutting spending in departments. It needs to apply a more general rule and reduce spending, and in so doing beef up the policy reserve.
5. Introduce more performance orientated spending –An interesting feature in the speech is to signal changes to the way provincial and local governments are funded. The MTBPS speech indicates that from April 2012 there will be a process to reward provincial governments and municipalities that “accelerate implementation”. In the MTBPS, the focus is on supporting smaller rural municipalities and to transform informal settlements.