/ 25 October 2010

Attention turns to medium-term budget

Attention Turns To Medium Term Budget

Finance Minister Pravin Gordhan’s Medium-Term Budget Policy Statement on Wednesday will shed light on the state’s spending priorities over the next three years, and potentially on the pace at which it plans to proceed with the national health insurance (NHI), economist Tony Twine said.

“This will contain revised spending data for healthcare for 2012/13 as well as a first look at 2013/14, which could reveal any plans to move towards the discussion paper budget,” he said.

“But policy makers will need to sharpen their pencils and perhaps cut back on some nice-to-haves in the proposed NHI if it is to be sustainable.”

The Treasury chief is expected to have about R40-billion in greater-than-expected revenue to manoeuvre with, thanks to the outperformance of corporate tax and VAT, and there is considerable curiosity on how he will allocate it.

Twine said Gordhan could not satisfy everybody, including those within the ruling party, and instead of doling out more money to departments while growth lags way behind the target of 7%, he should spell out how funds already allocated will be spent.

“Not everybody is going to get their share of the cake,” he said. “I would prefer to see how government intends to put in place spending of funds already allocated and get to work.”

Currency debate
Economists are waiting to see where Gordhan weighs in on the debate around the currency, following Reserve Bank Governor Gill Marcus’s surprise call last week for “extraordinary measures” to support industries most affected by the strong rand.

Gordhan responded to her statement with a warning that competitive currency devaluations by individual states could trigger a trade war.

The Democratic Alliance (DA) on Monday said the government’s concern over the value of the rand was misplaced because it focused on how to depreciate the currency.

“The most enduring and effective solution to concern over the value of our currency is to design an economy that is more attractive to long-term investment in the productive capacity in our economy.”

In the short term, the party advocated scrapping the remaining foreign-exchange controls and initiating a monetary policy debate on establishing a lower interest-rate regime.

But Twine warned that a “big bang” move on forex controls would be dangerous given the strength of the rand and the temptation this would pose for pension fund managers to diversify.

“If they did relax forex controls, they would probably up the fiduciary requirements of those funds in a way that would make a sudden offshore flow very threatening for those managers.”

Under pressure
Politically Gordhan is expected to walk a tight-rope on Wednesday, following the expected announcement of the ANC’s new growth path policy.

The DA said it was vital to veer away from greater state intervention, and in particular the debate on nationalisation, as it was scaring investors, but it seemed Gordhan lacked the clout to stem a move to the left in the administration.

DA MP Dion George told reporters: “There is no doubt that the finance minister has the intellect … but we don’t believe he has sufficient political muscle. He is under a lot of pressure.” — Sapa