The fiscal gap will widen to 5.5 percent of gross domestic product in the year through March 2012, from a revised 4.6 percent last year, the National Treasury said in its mid-term budget, released today. Borrowing plans will remain unchanged this year as the government draws down cash balances.

Finance Minister Pravin Gordhan, 62, has moved further away from a fiscal policy that saw the government post budget surpluses as recently as three years ago. Tax revenue has deteriorated as Europe’s debt crisis and weak global growth curbed demand for exports, eroded business confidence and pushed unemployment to 25.7 percent.

“The global environment poses considerable risks to the world economic recovery and the outlook for our own economy,” Gordhan told lawmakers in Cape Town. “The crisis of leadership currently reflected in the euro zone and in Europe is having a damaging effect on the global economy, including our own.”

The deficit is expected to narrow to 5.2 percent in fiscal 2012 and 4.5 percent the following year. In the February budget, the Treasury forecast an unchanged deficit of 5.3 percent for the current fiscal year, 4.8 percent in 2012/13 and 3.8 percent the year after that. The revisions are in line with the median estimate of seven economists surveyed by Bloomberg.

Wrong Direction

“This seems to be a reality check,” Kevin Lings, an economist at Stanlib Asset Management in Johannesburg, said in a telephone interview. “The overall situation is manageable but heading in the wrong direction.”

The rand erased gains, trading 0.7 percent weaker at 7.9275 against the dollar as of 5 p.m. in Johannesburg. The yield on the R186 government bond, due 2026, dropped 15 basis points, or 0.15 percentage points, to 8.33 percent.

The Treasury expects to miss its revenue targets set in the February budget by 10.3 billion rand ($1.3 billion) in the current fiscal year and by 18.7 billion rand the following year. It will fund the shortfall by drawing down its cash deposits and doesn’t plan to raise funds in foreign markets this year, the Treasury said.

State companies will borrow less this year, cutting the forecast for the public sector borrowing requirement by 34.9 billion rand to 8.1 percent of GDP, the Treasury said.

Greek Protests

“It’s probably not what they wanted to put out there but under the circumstances it’s not the worst set of numbers you could have had.” Nicky Weimar, an economist at Johannesburg- based Nedbank Group Ltd., said by phone.

Gordhan isn’t the only policy maker struggling to rein in a budget deficit. Protesters hurling rocks in Athens clashed with police last week as Greece’s parliament passed an austerity plan for further job layoffs and wage cuts. Mexico, Thailand, Venezuela and Hungary are among emerging markets that are forecasting wider deficits than predicted as revenue slides.

The Treasury said borrowing will be kept under control and it’s committed to narrowing the deficit, possibly by raising taxes and limiting state-worker wage increases.

“We know what the limits of our own fiscal trajectory is,” Gordhan said in an interview after his speech. “We will work within those limits and make the adjustments we need.”

Growth Forecasts

Gordhan trimmed his forecast for economic growth this year to 3.1 percent from 3.4 percent and lowered next year’s estimate to 3.4 percent from 4.1 percent, in line with the median estimate of seven economists surveyed by Bloomberg. Africa’s biggest economy expanded at an annualized rate of 1.3 percent in the second quarter, the slowest pace in about two years, as manufacturing and mining output plunged.

The growth forecasts assume “the orderly resolution of the European debt crisis, the avoidance of a debt recession and continued strong growth in emerging markets, particularly China,” the Treasury said. “A different international outcome will affect the domestic outlook.”

Growth is lagging behind the 7 percent annual expansion Zuma says is needed to meet his target of creating 5 million new jobs by 2020 to reduce the unemployment rate to 14 percent.

The Treasury plans to spend an additional 25 billion rand over the next six years to encourage investment, develop export processing zones and bolster productivity in a bid to encourage private companies to hire.