A widening budget deficit is expected next week when Finance Minister Pravin Gordhan presents his first medium-term budget policy statement (MTBPS) in Parliament next week.

In a statement on Friday, Investec economist Annabel Bishop said a budget deficit of 8.3 percent of gross domestic product (GDP) for the 2009/10 fiscal year was expected.

"This record outcome will be due to a sharp fall in revenue, particularly taxes on companies' profits as the impact of the global recession bites home.

"In addition, the contraction in GDP will in itself blow up the deficit, as a percentage of GDP," she said.

A similar level of government expenditure was expected to that budgeted, 16.2 percent higher year-on-year, she said.

This was due partly to the rising wage bill, creation of new departments and increased spend on social services in an effort to improve service delivery.

Bishop said revenue data for the first five months of 2009/10 was well below the corresponding five months of 2008/09, indicating that collections would be significantly lower than originally budgeted.

"Indeed, the deficit already amounts to R97.9 billion, in excess of that budgeted for the whole fiscal year of R95.6 billion and likely to double to R202.4 billion (8.3 percent of GDP)," Bishop said.

She said government was funding most of its deficit in the domestic capital market and the average weekly bond issuance had recently risen to R2 billion.

"However, this will further crowd out the private sector and push bond yields up, eventually quite substantially, due to oversupply in 2010/11 when the budget deficit is likely to be R199 billion or 7.5 percent of GDP."

Bishop said the risk of a rating outlook or even a rating revision would increase as government used borrowings to fund current expenditure.

Given the pressure on government finances, a clear case emerged for a loan from the World Bank to finance Eskom's capital expenditure needs, Bishop said.

This would replace additional government loans.

Bishop said that the impact on inflation if the proposed electricity tariff increases were implemented would be severe and ongoing, preventing the consistent attainment of the inflation target and casting doubt over the validity of the entire inflation targeting process.

She said no major changes in exchange control regulations were expected (either tightening or loosening) despite recent comments from government.

While the debate over the appropriateness of inflation targeting may be reawakened in the MTBPS it was unlikely any major changes would be instituted, "although there is room for surprise on this score", Bishop said.

This would be a good time to widen the band, as it could also result in some much needed temporary rand weakness, she added.

She said it was not expected that taxes would be increased as the economy reached its lowest point.

However, the implementation of the National Health Insurance (NHI) scheme appeared to represent a further burden on the dwindling taxpayer base, along with higher electricity tariffs, both of which would retard the recovery in consumer spending and hence job creation.

Bishop said the MTBPS was also likely give some insight into the costs and timeframe of the NHI.

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