S.Africa's budget deficit at 7.3 pct of GDP in 2009/10

CAPE TOWN (Reuters) - South Africa plans to maintain its spending commitments over the medium term to support the economy but will gradually cut its budget deficit as an recovery gathers pace, the National Treasury said on Wednesday.

South Africa’s budget moved back into deficit in 2008/09 as it ramped up spending to counter the effects of its first recession in almost two decades, after a few years of small budget surpluses.

The economy exited the recession in the third quarter of 2009 but tax revenue is expected to lag the recovery. As the economy recovers, revenue should rise to 27.3 percent of GDP in 2010/11, from 26.8 percent in 2009/10.

“Now that the economy is growing again, government will gradually reduce the deficit and moderate public debt so that fiscal policy can continue to play a supportive and developmental role,” the Treasury said.

The budget deficit for 2009/10 is estimated at 7.3 percent of gross domestic product, lower than the Reuters median consensus of 7.8 percent.

The shortfall is seen narrowing to 6.2 percent in 2010/11 and 4.1 percent by 2012/13.

The National Treasury said in its 2010 Budget Review government expenditure will moderate to 33.6 percent of GDP in 2010/11 from an estimated 34.1 percent of GDP in 2009/10.

Due to the recession, government revenue was 73.7 billion rand short of the targeted 731.2 billion rand for 2009/10. The Treasury expects to collect 738.4 billion rand in the next financial year.

To make-up for sluggish revenue, the government will need to borrow further to fund its spending, but sees further borrowing as a temporary solution to the country’s economic challenges.

Public sector borrowing requirement is seen rising to 11.1 percent of GDP in 2010/11 and government plans to lower it to 7.1 percent by 2012/13.

“The consequences of unsustainable debt levels have been highlighted in recent months. Greece, for example, has faced a sharp rise in its borrowing costs and must take extraordinary austerity measures to reduce (its deficit),” teh Treasury said.

“Given the need for rapid economic growth to boost employment, our economy cannot afford too sharp a rise in debt. Similarly, in the short term, we cannot afford to lower debt too quickly.”

Finance Minister Pravin Gordhan said higher government borrowing would be temporary because countries with low levels of debt will be better placed to take advantage of growth opportunities as the world economy recovers.

“To ensure that future growth and public service delivery are not compromised by unchecked rises in interest costs, our medium term fiscal framework allows for a gradual reduction in the budget deficit,” Gordhan said in parliament.

The Treasury in October appointed a ministerial task team to identify areas where government could save money.

The task team’s report said 23 billion rand will be saved in the next three years by cutting costs. The cancellation of the Airbus A400M military aircraft contract will save about 13 billion rand over the next seven years.