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In recent years, the Minister has stuck closely to his expenditure budgets, while the revenue overrun in 2013/14 allowed the him to show a smaller Budget deficit for 2013/14 (4.0% of GDP versus the 4.2% projected in October last year). The main budget deficit narrows to 2.8% of GDP by 2016/17.

Concomitantly, the primary budget balance (revenue less non-interest spending) narrows from -1.8% of GDP in 2013/14 to -0.3% in 2016/17 – enough to stabilise the gross loan debt ratio at 48.3% of GDP.

The numbers, importantly, rely on continued expenditure restraint, with real non-interest spending increasing at just 1.9% per year over the medium term. Expenditure declines relative to GDP over the period – failing which the debt ratio is likely to continue rising. Also, we need a sustained firm business cycle upswing to support revenue (else we are likely to get higher taxes).

Note, the level of debt is projected to increase close to the previous high recorded in the mid-1990s and leaves Government with no room to manoeuvre in the event of any unexpected downturn in the economy. Similar to Trevor Manuel, who was Minister of Finance from 1996 to 2009, Minister Gordhan will need to not only stabilise, but also lower the debt level in time to create “fiscal space”.

Trevor Manuel reduced the gross loan debt ratio from 50% of GDP in mid-1997 to below 30% of GDP by mid-2008. He achieved this by, initially, applying material expenditure restraint, notably by constraining the wage bill. Consolidated spending by Government and the provinces on compensation declined from close to 13% of GDP in the mid-1990s to less than 10% of GDP by early 2007.

Once the debt ratio had been reduced, which lowered the interest burden and freed up resources, Minister Manuel accelerated Government expenditure.

But, Trevor Manuel operated in a buoyant growth environment – especially from 2000 (although it is important to note his prudent policies contributed to a favourable investment environment and GDP growth). Indeed, following modest economic growth from 1997 to 1999, real GDP growth averaged more than 4% from 2000 to 2008. Growth was driven by strong fixed investment spending (especially from 2003) amidst robust productivity gains.

The current business cycle upswing, however, has been based on consumption spending (including Government consumption, which is at its highest level in history at more than 22% of GDP). Also, productivity growth is moderate. Meanwhile, the marginal rate of return on capital is too low to ignite a robust private sector investment upswing. This is not an environment in which we should anticipate a robust, sustained economic upswing with any degree of confidence.

Still, the Minister has delivered what he can through a Budget that focuses on expenditure restraint (including wage growth restraint). The limited room to manoeuvre is painfully visible in social grants spending, where the Minister shows no real growth in expenditure – especially considering inflation rates tend to be higher for the poor when food prices are rising.

The emphasis on measures to boost small business development is especially welcome. The small business sector is, after all, South Africa’s best shot at boosting much-needed employment growth. This includes support for venture capital companies by easing the rules pertaining to accessing foreign capital. Economies grow through a process of creative destruction. Venture capital companies can put new ideas into practice in support of this.

Overall, the bottom line is that an economy where the currency has depreciated sharply against the backdrop of a relatively wide government budget deficit, reflected in a large current account deficit, must tighten policy. That’s what the Minister has aimed to do with this Budget.

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