21 Feb 2018

Budget: Fiscal adjustments and higher GDP growth

Annabel Bishop

Chief Economist

to reduce fiscal deficit aimed at stabilising government debt

Figure 1: Consolidated government fiscal framework, 2015/16 - 2020/21
  • The 2018 Budget proposes that necessary fiscal measures, alongside higher GDP growth outcomes, will reduce the deficit and stabilise gross government debt over the medium term. Specifically, the consolidated budget deficit is projected to decline from 4.3% of GDP in 2017/18 to 3.6% of GDP in 2018/19 and 2019/20 and to 3.5% in 2020/21.
  • According to the Treasury, the “narrower deficit, stronger rand and lower borrowing costs” will result in gross government debt stabilising at 56.2% in 2022/23 and receding thereafter, with net debt peaking at 53.2% in 2023/24.
  • The fiscal measures outlined in the 2018 Budget showed that most of the burden of adjustment was concentrated on the revenue side, via further tax policy adjustments. The extent of expenditure side adjustment was restricted by the provision for fee-free higher education. Ideally, fiscal consolidation that ensures long-term fiscal sustainability, and creates the space to absorb any future economic shocks and the funding of new policy priorities, should be biased towards expenditure cuts.
  • The efforts of the moderate fiscal consolidation outlined in the 2018 Budget are likely to be deemed as sufficient to avert a Moody’s downgrade.
  • However, averting further credit rating downgrades over the longer-term will require a sustained economic growth recovery to 3.0% and beyond. In a persistently weak growth environment, accomplishing fiscal consolidation will be difficult. Effective policy implementation and the enhancement of policy certainty are required to restore business confidence and enhance the investment climate which would ultimately lift potential GDP growth.
Figure 2: Main budget revenue and non-interest spending
Figure 3: Consolidated budget deficit: actuals and forecasts

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