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Gordhan: Wage hikes could have a negative impact on growth

By Staff Writer
The South African economy may expand a bit faster this year than what was forecast in February but mid-term growth rates look set to fall short of government's aspiration, this is according to Finance Minister Pravin Gordhan.

In a written response to questions in parliament, Gordhan also said recent above-inflation wage hikes would weigh on state finances in the longer term as government borrowing levels and interest costs rose.

In its 2010 budget tabled in February, the National Treasury forecast growth of 2.3% this year after the economy contracted 1.8% in 2009 in recession while growth was seen at 3.2% in 2011 and 3.6% the year after.
"These forecasts will change when the mid-term budget policy statement is delivered on 27 October," Gordhan said.

"The economy performed slightly better than our projections in the first two quarters of the year so the actual growth outcome for 2010 may be moderately higher than our budget forecast."

Gordhan has previously stated that domestic growth should reach seven percent a year for the next 20 years in order to cut into the alarming unemployment rate of 25%.

"While we do not expect South Africa to achieve or be able to sustain growth of 7% any time soon, I believe that the goal of 7% growth is something that we should aspire to so that poverty can be reduced more quickly," he said.

According to National Treasury modelling, if South Africa sustains a 7% growth for 10 years, national income would double and the economy would generate roughly 5.5 million jobs.

Gordhan said a strike by about 1.3 million state workers, recently settled with unions agreeing to 7.5% wage increases and R800 a month for housing, could hurt state finances in the long term.

"Although the public service strike caused disruptions to service delivery and economic activity, we do not expect our (economic growth) forecasts to have been materially affected," Gordhan said.

"But the longer-term impact of the higher wage settlement ... will be much more serious as interest costs rise in response to higher government borrowing."

If the large real wage settlements - which are double the annual inflation rate - were not matched with higher productivity, the outcome of the strike could also fuel inflation.

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