Gordhan to Rein in South African Budget Even as Spending on Jobs Increases

South Africa’s plans to ramp up spending to boost jobs probably won’t hurt Finance Minister Pravin Gordhan’s efforts to narrow the budget gap. They may not be enough to slash unemployment either.

Gordhan will give more detail of a 9 billion-rand ($1.3 billion) employment fund first announced by President Jacob Zuma in his state-of-the-nation speech on Feb. 10, when he announces the budget tomorrow. Zuma also outlined a 20 billion-rand tax incentive program for manufacturers.

“These job-creation initiatives can be successful to some extent,” said Jean-Francois Mercier, an economist at Citigroup Inc. in Johannesburg. “But we can’t fool ourselves that it’s going to have a significant impact on unemployment.”

One in four South Africans is unemployed and the jobs programs, some of which will be spread over three years, represent 3 percent of spending planned for the fiscal year through March 2012. Moreover, the government is also moving to tighten labor laws, making it harder to employ people on temporary contracts, potentially damping demand for new workers.

“The new labor proposals are very burdensome,” said Lorraine Lotter, executive director of the Johannesburg-based Chemical and Allied Industries Association. “It’s concerning that at a time when jobs are the main priority, there is legislation going against that.”

The unemployment rate fell to 24 percent in the fourth quarter from 25.3 percent in the previous three months. Still, Africa’s biggest economy has shed more than 1 million jobs since slipping into recession in the fourth quarter of 2008, distancing the government from its target of slashing the jobless rate to 15 percent in the next decade.

Budget Deficit

Gordhan will address Parliament in Cape Town at about 2 p.m. local time tomorrow.

The median estimate of 14 economists surveyed by Bloomberg is for a budget deficit of 4.7 percent of gross domestic product in the year beginning April 1, compared with Gordhan’s October forecast of 4.6 percent. The shortfall will reach 5.4 percent this year, compared with a previous forecast of 5.3 percent, and narrow to 4.1 percent in 2012-13, according to the survey.

“The minister will present this as a job creation-friendly budget,” said Mercier. “Jobs are clearly the priority. But the budget deficit targets won’t be different” from the October forecasts.

Zuma said in his state-of-the-nation speech the government’s objective is to bring the deficit down to between 3 percent of GDP and 4 percent by 2013.

The Year of Jobs

This year’s slightly wider deficit probably won’t affect the bond market, as the government will use cash and short-term borrowing, rather than sell more bonds, to meet its financing requirements, said Andre Roux, head of fixed income at Cape Town-based Investec Asset Management. A smaller deficit in coming years would be “welcome news to the bond market.”

Bonds have dropped in the past six months, with the yield on the R157 security, due 2015, rising 44 basis points, or 0.44 percentage point, to 7.77 percent as of 9:45 a.m. in Johannesburg. The rand has gained 1.6 percent to 7.2253 per dollar in the same period.

“We have declared 2011 a year of job creation through meaningful economic transformation and inclusive growth,” Zuma said on Feb. 10. “While looking to the private sector in particular to help us create most of the jobs, government will certainly play its part.”

The public sector accounted for as much as 148,000 of the 157,000 jobs created in the last three months of 2010, the statistics office said on Feb. 8. For unemployment to continue falling, private industry will have to step up hiring.

Smoke and Mirrors

Not all the money announced by Zuma for job creation last week was new.

The 20 billion-rand tax incentives for manufacturers started in November and were included in the state’s budgeted expenditure, said Sidwell Medupe, spokesman for the Department of Trade and Industry.

Manufacturers that set up new projects of a minimum of 200 million rand will receive 900 million in tax allowances, while those that invest a minimum of 30 million rand to expand operations will receive 550 million rand in tax breaks. The department has already received seven applications from investors to qualify for the tax breaks, Medupe said.

There is also concern that economic growth is not strong enough to cut the jobless rate.

Economic expansion accelerated to 4.2 percent in the fourth quarter from 2.6 percent in the previous three months, according to the median estimate of 21 economists surveyed by Bloomberg. That is short of the 7 percent the government says it needs in order to crate 5 million jobs by 2020.

“There is still caution about the economic recovery,” said Mercier. “The economic environment is mixed. Consumer spending is picking up, but business investment is clearly lagging.”