Going for a surplus but presenting it as a deficit

The 'structural budget balance' introduced by Finance Minister Trevor Manual in his mini-budget on Tuesday 30 October effectively allows him to present a budget surplus as a budget deficit over the next three years.

According to JP Landman, Political Analyst at BoE Private Clients, the purpose of presenting an apparent budget deficit is to allow the Minister to deflect political pressure that he should spend more, specifically on recurrent expenditure, or use the surplus for tax relief purposes.

"The structural budget balance also called a cyclically adjusted balance is simply the budget balance adjusted by above-normal tax receipts received during boom years, and, correspondingly, by below-normal tax receipts during difficult years. It is of course a theoretical figure and obviously quite difficult to calculate. 

"The impact, in terms of the way Treasury has calculated the figure for the mini-budget, is that our real budget balance (ignoring the good times we are currently enjoying) is actually a deficit of 1%, even though the Minister is budgeting for a surplus of 0,6% of GDP over the next three years," says Landman.

Describing this aspect of the mini-budget as "one of the neatest finesses that Trevor Manual has played in his ten years as Finance Minister", Landman notes that the surplus actually achieved (in the absence of the structural budget balance) will result in a reduction of debt as a percentage of GDP to 23% this year, relative to 33% three years ago. It is forecast to reach 16% by 2010.

Landman disputes reports suggesting that the surplus achieved in the year to February 2007 was a result of budgets not being spent, noting that the surplus of R10,8 billion was in fact almost twice the amount of unspent funds.

"In addition, one must remember that the budgets have risen considerably more than inflation.  Even if unspent funds represent 2% of the budget, the 98% represents a real increase in the amounts spent.  I remember the 1990s when we consistently exceeded our budgets. I would rather live with 2% under-spending than 2% over-spending," he says.

Commenting on the mini-budget as a whole, Landman says that it helps interest rates, enhances government savings, enhances infrastructural investment and shows that spending capacity is progressively improving.

"All of that is good news for the equity markets.  Over the three year budget cycle, growth will fall to 4,5 % before going back to 5% and inflation can go back into the target band. It is a solid environment for investors," he concludes.