Mini-Budget: SA’s growth slows yet again

South African Finance Minister Pravin Gordhan says SA’s economy is now only likely to grow at 0.5 percent this year, which is lower than previous estimates.

The minister is delivering his Medium Term Budget Policy Statement today (October 26).

To counter this, more belt-tightening measures will be put in place, and taxes will be raised.

In the meantime, the state will spend the money for the common good, says Gordhan, hinting that the #FeesMustFall movement’s endeavours are paying off.

Earlier this month, the International Monetary Fund said growth this year would likely be 0.8 percent, and then later said the gross domestic product (GDP) would only expand by 0.75 percent next year. National Treasury had, in February, predicted 0.9 percent.

South Africa narrowly averted a recession in the last quarter for which data is available, when the economy expanded 3.3 percent after narrowing 1.7 percent in the three months before that.

A Bloomberg survey of 24 economists shows the economy will likely grow at 0.4 percent this year, which will be the slowest rate of growth since the 2008/9 global recession.

In February, at the main budget, Gordhan forecast growth to tick up to 2.4 percent, but Bloomberg’s survey now has this coming in at 2.4 percent. National Treasury now forecasts 2.2 percent by 2019.

The National Development Plan (NDP), SA’s roadmap to get rid of poverty and fight inequality, targets growth of 5.4 per cent.

In documents tabled alongside the budget on Wednesday afternoon, Gordhan lamented that the projected 0.5 percent growth for this year is “much too slow for us to radically remake South Africa into a society based on social justice and dignity for all”.

Sluggish economic growth at those levels is not sufficient to create the number of jobs SA needs, with unemployment officially stubbornly above 25 percent, and will also not help grow the tax base, which would help the state trim is debt and budget deficit.

Gordhan says, in response to “the new global reality and the need to scale up the pace of social transformation”, government has been adjusting fiscal policy to achieve stability and sustainability. “A stable and sustainable fiscus, alongside economic reforms and transparent monetary policy, will support a return to the growth rates needed to achieve the NDP’s goals.”

The minister notes that these efforts have narrowed the budget deficit, despite gross debt and interest payments on this having grown.

However, Gordhan warns, low levels of economic growth will require additional revenue measures – indicating at possible increases in taxes – as well as further spending cuts over the next three years.

This, he says, should see national debt stabilise at 47.9 per cent of GDP in 2019/20.

In February, Gordhan said it reduced spending would see net national debt to stabilise at 46.2 percent of GDP in 2017/18 and to decline after that.

Marc Joffe, CEO of Global Credit Ratings, has previously explained that higher debt levels can make it more difficult for government to raise funds. This is because, as the debt ratio increases, creditors – and ratings agencies – become increasingly concerned about a country’s ability to pay back what it owes.

Already, South Africa is being closely watched by ratings agencies and investors. Both Fitch and S&P have the country’s credit rating a notch above junk, with a review due in December. Moody’s rates SA two notches above junk, but could also lower its standing.

This would make it difficult, and more expensive, for SA to raise funds and encourage foreign direct investment, which would aid economic growth.

Gordhan says economic growth is forecast to increase moderately over the next three years, but there are significant domestic risks to the outlook. “New spending pressures also continue to materialise, and liquidity risks at some state-owned companies persist. What we need most right now is faster, inclusive, job-creating growth.”

Calling on all South Africans to work together again, he says government continues to strengthen its active collaboration with business and labour to revive investment growth, and is working to provide greater policy certainty and improve labour relations.

“Our efforts will continue to be multifaceted: promoting inclusive growth, cultivating business and consumer confidence, and spurring investment.”

However, until these reforms are felt, there are difficult choices as to how best to use SA’s limited resources, and share them in a time of need. As SA’s Constitutional mandate calls on it to spend public funds for the common good, Gordhan says “government proposes to enhance the investment in our future and protect the progress we have made towards realising the fundamental rights of all who live in South Africa”.

This will see spending sustained on social services and economic infrastructure, and “reallocating funds to reduce hardships faced by higher education students in financial need”.