How to find 'sweet spot'

Finance Minister Pravin Gordhan cannot make any particularly new policy choices (revenue or expenditure) ahead of the ANC's elective conference at the end of the year.

Yet he must also show commitment to spending to improve South African lives and fund infrastructure and jobs agenda-related programmes, too.

This is the view of economist Peter Attard Montalto of Emerging Markets Research at Nomura in London.

"As such, put simply, we think in an attempt to maintain a conservative balance Treasury is likely to do little in the budget. That does not mean the budget cannot fall foul of the market and fail the credibility test."

But Treasury had to find "a sweet spot" between being realistic on sustainability, realistic on growth (and hence revenues) and realistic on funding potential.

These were not necessarily parallel concepts and certain issues had to be dealt with, Montalto said.

First, Treasury had to present a more credible range of forecasts. In the medium-term budget policy statement it forecast growth of 3.4% for this calendar year and 4.1% next year, while inflation was projected at 5.4% this year and 5.6% next year.

"We think these were too optimistic at that time and more so now. Our growth forecasts are 2.3% for this year and 3.6% for next year, while the consensus is 2.8% and 3.5%, respectively.

"Equally, on inflation we forecast 5.7% and 6% this year and next year and the consensus is also projecting 5.7% and 5.5%."

Montalto said about two-thirds of the budget deficit outperformance in the current fiscal year had been caused by domestic demand strength leading through to VAT and employment tax increases, while the other third had been caused by spending undershooting.

"Our lower growth forecast than consensus for this year is caused in part by our eurozone recession view affecting export demand in the first half of the calendar year, but also, and more importantly, the pass-through this will have in the second half of this year to domestic demand and employment.

"This is one of the key drivers of our somewhat more bearish fiscal view for the coming year.

"In our view, another growth forecast of 3% or above for this year would not be viewed as realistic.

"In our view, Treasury forecasts have again been overly optimistic with the MTBPS pencilling in public-sector wage growth of 5.5%-6.% for the coming fiscal year - this is unrealistic, both because of inflation and because of recent events. We see wage settlements in the public sector coming in about 7%-7.5%, which adds about R5-billion to the budget."

Second, Montalto said the budget had to take a more direct account of the long-term costs of currently announced or well-known plans such as the National Health Initiative and infrastructure.