S.Africa to cut budget deficit gradually, debt up

By Gordon Bell

CAPE TOWN (Reuters) - South Africa's fiscal deficit probably climbed to a record 7.6 percent of GDP this financial year due to recession but will fall gradually to avoid the country carrying unsustainable debt, the National Treasury said on Tuesday.

The first recession in nearly two decades has slashed consumer spending and company profits, resulting in an estimated 70.3 billion rand less in tax than was budgeted for in February. Spending remains relatively high to help the economy pull through the downturn.

Debt has jumped, with the public sector borrowing requirement up sharply at 11.8 percent of GDP from 2009/10 (March-March) before subsiding slowly to 8.4 percent over three years.

"Higher borrowing is, however, only a temporary solution," the Treasury said in its Medium Term Budget Policy Statement. "Over the medium term, the deficit will have to be reduced gradually."

Failure to reduce the shortfall would lead to debt service costs crowding out social spending, or may force the government to raise taxes to meet rising interest costs.

Measures such as broadening the tax base, improving compliance and new taxes such as environmental levies may be necessary, and the rate of growth of spending would have to moderate over the next few years.

The country had the fiscal space to run a significant deficit to support a recovery in the economy, which was seen as relatively slow -- the economy should grow 1.5 percent in 2010 from a 1.9 percent contraction this year.

The budget shortfall for 2009/10, the biggest gap since records started in 1961, was in line with economists' forecasts but the projected shortfall for next year was larger than the consensus. The gap measured 1 percent last year and Treasury had estimated a 3.8 percent shortfall.