The government will want to send the right signals to investors in next week’s Budget. Reg Rumney looks at its options
Will the Budget stimulate the already blossoming economy, depress it, or have no effect? Whether the March 15 Budget will be — to put it in economic jargon — contractionary, expansionary, or neutral is only one of the guessing games economists are prone to.
Three of the country’s eminent economic departments have come up with three contrasting opinions.
The Amalgamated Bank of South Africa’s latest Economic Spotlight sees the 1995/96 Budget having an expansionary impact on economic output. The Budget, says Absa, could increase South Africa’s economic growth by 0,6 percent — all other things being equal.
Old Mutual’s Dave Mohr has written in the OM Economic Report: “The upcoming budget will probably be relatively contractionary, although we foresee only limited scope to reduce the budget deficit.”
Sanlam’s economists reckon, “The effect of the Budget will probably be largely neutral.”
It all depends on definition. Rand Merchant Bank economist Rudolf Gouws explains that any Budget deficit can be seen as expansionary in the short term. The government is borrowing to spend.
What is important is the “fiscal impulse”, the change in the deficit before borrowing, or the difference between projected revenue for the year and projected spending.
“On balance the Budget will be contractionary if you define the fiscal impulse as the change in the Budget deficit,” says Gouws.
There is little doubt Finance Minister Chris Liebenberg will want to send the right signal to the financial markets and the world in general on March 15. To do this he will have to cut the Budget deficit, expressed as a percentage of the gross domestic product, which measures the total value of the goods and services produced in the economy. The government is on track to achieve its forecast 6,6 percent deficit of GDP — or R29,2-billion — for the 1994/95 financial year.
Thanks to good economic growth, government revenue for this year is better than expected. Sanlam estimates tax revenue will amount to R108,5-billion against the budgeted R105,8- billion.
On the spending side some discipline has been exercised, although Sanlam believes total spending for the entire year will be R1-billion more than the R135-billion budgeted — not a particularly good sign.
Hence Sanlam believes the 1994/95 Budget deficit will actually end up lower than government’s budgeted figure — approximately
6,2 percent or R27,5-billion.
But what of the coming year? Absa believes the deficit will drop to 5,9 percent of GDP (or R29,7-billion) in the 1995/96 fiscal year — still too high for comfort. Others hope for a deficit of much less, say 5,5 percent of GDP.
How is Liebenberg to do this? There are several ways to cut the deficit.
First Liebenberg needs to keep a lid on spending, but the demands of the reconstruction and development programme, among other things, will not give him too much leeway.
Gouws believes Liebenberg will want to keep the increase in government spending in line with the inflation rate he expects for the year, giving in effect a zero real spending increase.
Economists foresee inflation ranging from nine to 11 percent this year. Absa’s economic research department predicts government spending will increase by around 11 percent compared to this year’s increase of some 13 percent. “For the coming year, cutbacks in real terms will be difficult to implement owing to pressure from the electorate and because of the October municipal elections.”
Sanlam expects a rise in budgeted spending of 10 percent.
Liebenberg’s other main course is to increase revenue. That means more tax and it is accepted by the government and virtually everyone else that the overall South Africa tax burden is already high enough.
Absa believes the revenue increase in the 1995/96 fiscal year should be around 13 percent — roughly in line with the increase for 1994/95.
This, says Absa, would bring the revenue to GDP ratio to the 24,4 percent level which is close to the maximum tax capacity of the country.
Sanlam expects revenue to increase 11 percent — on current scales — leading to a 6 percent deficit, but thinks Liebenberg will not find this figure acceptable, suggesting revenue will have to rise more to allow him to cut the deficit further.
The third way of cutting the deficit is out of the Minister’s hands. Much higher growth means not only an automatic rise in tax revenue, but also a higher GDP figure as a denominator. This turns out a lower percentage deficit, QED.
What figure Liebenberg is working on is not known now.
Economists polled by the Weekly Mail and Guardian earlier this year gave an average growth forecast of 3,1 percent for 1995, and of 3,3 percent for 1996. Economic growth, as the South African Chamber of Business stresses, is the key to further tax reform and the realisation of the RDP’s goals. “If the economy manages to expand by 3,5 percent during the 1995/96 fiscal year this should generate about R3,8-billion in additional taxes for the government.
“However, if the allocations to the RDP are to continue to increase as planned, and the deficit is to be further reduced, higher rates of economic growth will be necessary.”
It will be tempting to look only at the deficit on March 15, but behind it two other problems loom large: high government debt and continuing dissaving. Governments dissave when they spend money on recurrent items such as salaries and interest, rather than on capital projects which should give a return in future. It is often likened to a consumer using a credit card to buy groceries and pay the interest on his overdraft.
The government of national unity has inherited a high debt level from the previous regime.
Absa’s Spotlight warns that the debt to GDP ratio may reach 57 percent in the coming fiscal year, compared to only 42,4 percent five years ago. Debt servicing accounts for 20 percent of government spending, according to Absa economist Christo Luus. Dissaving by the government, amounting to more than R18-billion a year, the Spotlight adds, is undermining the country’s savings effort and hurting investment and growth in the long run.
The government will find it difficult to spend less on salaries because of the burden of keeping on bureaucrats of the old regime while practising affirmative action.
Privatisation, says Luus, would be ideal for balancing the books. With one stroke it can help pay off government debt with a big boost to state coffers, reduce the interest bill, and move state employees off its books and into the private sector.
The government will probably not be able to embark on a big privatisation programme this financial year — it can sell off state assets — but next year this will have to be considered.