South Africa unlikely to loosen social purse strings in midterm budget

By Wendell Roelf CAPE TOWN (Reuters) - With babies strapped to their backs, women wait for hours at the crowded social security office in South Africa's Gugulethu township for tiny child support grants that often make the difference between subsistence survival and starvation. But their pleas for higher payouts are unlikely to sway Finance Minister Pravin Gordhan when he announces his midterm budget on Wednesday. Instead, with revenue under pressure as economic growth remains subdued in the wake of a 2009 recession, he is expected to keep a rein on spending to pacify ratings agencies worried about profligacy ahead of elections next year. Gordhan will probably also widen his budget deficit forecast for fiscal 2013/14 to 4.9 percent of economic output from the 4.6 percent seen in February, a Reuters poll of 15 economists found. That means poor South Africans such as Anna Mara, a 43-year-old who gets 300 rand a month for each of her three children, will have to keep a close eye on their outlays to stretch their meagre government grants as far as possible. "It is better than nothing, but we are struggling to cope," said Mara. "Bread costs 10 rand a loaf, electricity is expensive, and 50 rand doesn't even last a week. Transport to school for the children is also high," she tells Reuters above the din of crying infants in the social security office. Two decades on from the end of apartheid, millions of people - most them black - still live in shanty town squalor, with the government extending grants to the most vulnerable, including children, the elderly and disabled. But with gross domestic product growth seen at an anaemic 2 percent this year, pouring billions of rand into social welfare is costing Africa's biggest economy dearly as it grapples with chronic budget gaps. "On the basis of how much is being borrowed at the moment to fund amongst other things social grants, one could call it bordering on the unsustainable unless we start to generate more tax revenues," said ETM economist George Glynos. SOCIAL GRANTS TO RISE More than a quarter of South Africa's 52 million people receives grants, and payouts amounted to 113 billion rand in the 2012/13 financial year. This is likely to rise to 130 billion rand in three years when the government is expected to disburse an estimated 17.2 million grants, up from 15.2 million last year. However, Gordhan dare not cut social spending, especially as his ruling African National Congress (ANC) prepares for elections next year. Even though it is almost certain to win, its overwhelming parliamentary majority may take a knock. "Once you have offered grants to the poor and they are expecting it and have structured their lives around it, it becomes very difficult for the government to scale back," Glynos said. Tensions are already high in teeming black townships where residents sporadically loot and burn shops in anger over a lack of adequate housing, electricity and sanitation. The overt materialism of the ruling elite stokes the anger further. But yielding to any internal pressure to fund social largesse would only antagonise investors and ratings agencies who have downgraded the country's credit rating over the past year, spooked by often violent strikes in the mining sector. "South Africa is still at risk of a rating downgrade and as such needs to exert great caution in fiscal expenditure," said Investec economist Annabel Bishop, saying Gordhan needed to find some way of cutting costs. "This is difficult in a pre-election year. But the rapid escalation in public sector salary and wages would be a good place to start." Gordhan could draw some reassurance from history, which shows that while tightening spending could cost the ANC a few votes, it faces little danger of defeat by the main opposition Democratic Alliance, still seen by many blacks as the party of white privilege. "We've never seen much in the way of a pre-election burst of spending on the part of the government," said Peter Worthington, an economist at Absa Capital. "This is partly because everybody knows the ANC is going to win the elections regardless."