MTBPS: not so good news!

Two things stand out from Minister Pravin Gordhan’s mid-term budget policy statement (MTBPS) which he delivered to parliament on 27 Oct. The first element is the fact that for the first time in many years, our government is going to borrow money to supplement the projected budget deficit. Minister Gordhan expect SARS to raise 5% less (R34 billion) in taxes than what was communicated in the budget speech of February 2009. Coupled with this reduction in government revenues, is an increase in government expenditure as compared to the 2008/9 fiscus. These factors combined mean a budget deficit equivalent to 7.6% of the expected GDP, hence the need for borrowing. Reducing government departments’ budget to ensure that government expenditure falls within the expected revenue sounds like an obvious solution to the problem however, South Africa is a country which still requires a lot of government intervention in terms of infrastructure and human development, as such reducing expenditure would have a long-term negative social impact. Other than borrowing, the only thing Minister Gordhan could hope for is that the economy turns to a point where more people become employed and thereby increasing the overall tax base.

Poor GDP Projected

This brings me to the second element which stood out from the MTBPS which is that the Minister is projecting a 1.9% contraction in GDP by the end of 2009. This contraction in GDP puts paid to any hopes that enough jobs could be created by the end of the year to boost government’s revenue from taxes. Interestingly, revenue generated from customers and excise duties is expected to decline and the direct effect of this is that less funds will flow to the Southern African Customs Union members. Small countries such as Lesotho and Swaziland who rely so heavily on the SACU revenue will be hit very hard indeed. This lends a certain level of truth to the belief that when South Africa sneezes the rest of Southern Africa catches the flu.