Medium Term Budget Policy Statement held few surprises

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By Kevin Lings

The Medium Term Budget Policy Statement, presented by the Minister of Finance today held few surprises. The following are key changes worth noting:

• GDP growth forecast have generally been revised down, as expected. This is especially the case for 2009, which drops from 4.2% to 3.0% (see chart attached)

• Fixed investment spending forecasts are marginally lower, but are expected to remain above 8% in real terms over the next three years (see chart attached)

• The current account is still expected to reflect a very substantial deficit, which is forecast to widen to almost 9% of GDP in 2010

• The inflation forecast for 2008 and 2009 has been revised up significantly. (The 2009 estimate is increased up from 4.9% to 6.2%). This revision is in-line with expectations (see chart attached).

• The Treasury expects inflation to move back inside the target range towards the end of 2009.

• The inflation target remains unchanged at 3% to 6%, but the target measure will change from CPIX to CPI on the back of the changes to the composition of CPI. This is effective from the beginning of 2009

• Revenue estimates are little changed. The Minister acknowledged the downside risks to revenue

• Expenditure have been revised up fairly significantly for the next three years. In fact there is a 16% increase in expenditure budgeted for 2009/2010. This increase should act to boost the economy at a time when the private sector, especially consumer spending, is under pressure. This increase in expenditure will be deployed in a variety of departments and projects.

• The main budget balance is forecast to move modestly into deficit during 2008/2009. On a consolidated basis the deficit for 2009/10 is projected at 1.6% of GDP.

• The government financing requirement will increase over the next 3 years. In 2008/2009 the main government financing requirement increase from +R15.2bn to –R6.6bn. It then rises to a substantial –R50.7bn in 2009/2010. That excludes funding from non-financial public enterprises. There will be no additional offshore funding raised during the 3 year period, which is in-line with Treasury’s stated objective. The local bond should be able to accommodate the additional funding next year.

Overall there were no real surprises in the MTBPS. The revisions to the macro-economic forecasts were largely in-line with expectations. There was no significant change announced to fiscal policy, while inflation targeting was further endorsed. There was no evidence of populist policy measure being introduced. The Minister took the opportunity to highlight South Africa’s many positive macro-economic conditions relative to many other countries, especially the soundness of our banking sector. This is appropriate given the current global financial market turmoil. The most interesting aspect of the MTBPS is the fact the government is looking to increase expenditure at a time when growth in private economic activity is under pressure. While this will obviously lead to a budget deficit (but not an increase in taxes) the approach is in line with government less pro-cyclical policy stance and prudent given the current economic conditions.

Click here for the PowerPoint presenation.

Source: Kevin Lings, Stanlib, October 21, 2008.


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