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Finance Minister Pravin Gordhan

" 'Implementation of the national health insurance  scheme is a major risk to fiscal consolidation'

Finance Minister Pravin Gordhan will table the budget in parliament in two weeks and the expectation is that the budget deficit could be even bigger than the 5.5% forecasted in October as economic growth, which affects tax revenues, has disappointed.

In October the Treasury forecast growth of 3.1% for 2011 and 3.4% for this year. While many analysts believe the 3.1% might have been achieved last year, there are serious doubts about the 3.4% forecast. The Reserve Bank expects growth of 2.8% this year and Gordhan said last week that growth might well be below 3% this year.

Raymond Parsons, deputy CEO of Business Unity SA (Busa), said this week that SA was expected to be a laggard among developing economies in 2012. Busa revised its growth forecast for this year from 3% to 2.7%.

"One of the main drivers for this revised outlook is the dampening of global growth and demand from SA's key trading partners, in particular the eurozone, which accounts for about a third of our trade," Parsons said.

He referred to a recent study published in The Economist which showed SA is ranked 10th out of 27 countries in terms of having little further room to manoeuvre in fiscal and monetary policy.

"With deteriorating prospects for the world economy, growing adverse effects on the domestic growth trajectory, a limited tax base and spending pressure from existing social entitlements, SA's fiscal 'space' is shrinking," he said.

After the budget the next step would be to implement policy effectively and to deliver on promises, Parsons said.

According to Matthew Sharratt, South Africa and Nigeria economist at Bank of America Merrill Lynch, the Reserve Bank will also be constrained in the policy options it can take in the light of rising inflation and low economic growth.

"The Reserve Bank faces a dilemma and will probably remain on the sidelines and keep interest rates on hold for an extended period," he said.

Sharratt said that, due to the weak growth environment, the Treasury's fiscal consolidation plans had been delayed for another two years.

"Government borrowing is likely to be revised higher this year as the Treasury has a GDP forecast for 2012 at 3.4%, which will likely be revised down in the budget."

Bank of America Merrill Lynch expects growth of only 2.5% for the year.

Sharratt said while he was not too worried about the delayed fiscal consolidation, the story about it could weigh on investors' perceptions of South African bonds.

"However, it really depends on the global picture," he said.

Standard&Poor's said on Friday the eurozone should gradually climb out of its mild recession in the second half of this year and into next year.

According to Bank of America Merrill Lynch, SA's impending implementation of the national health insurance (NHI) scheme is a major risk to fiscal consolidation goals.

Details of how the NHI, which will increase healthcare spending by 150% in real terms by 2025, will be funded, have not been released yet. The budget and the expected White Paper on the NHI, which is due soon, should give a clearer indication.

Ernie Lai King, tax executive at law firm Edward Nathan Sonnenbergs, said he hoped there would be a progress report on the latest thinking on how to fund the NHI.

Lai King said that as he expected job creation and the nurturing of the economy to be priorities in the budget, he looked forward to an update from Gordhan on the success achieved so far by the Job Creation Fund.

The fund was announced by Gordhan last July after President Jacob Zuma first declared the initiative in last year's state of the nation address.

Lai King expected no significant tax amendments in the budget. Despite speculation of an impending "super tax" for the very wealthy, he said he did not expect a change in the maximum marginal tax rate for individuals. Any tax relief will be restricted to the lower earnings levels.