In the fifth part of our series on economic policy, Asghar Adelzadeh and Mathane Lethale of theNational Institute for Economic Policy consider whether government policies have positioned theeconomy towards job creation, poverty reduction and sustainable growth
The Growth, Employment and Redistribution strategy’s (Gear) success is not going to be based on whether the government meets the deficit target, or whether exchange control is removed or on whether tariff barriers come down.
Instead for most people, it’s about whether these and other policies are going to lead to reductions in the unemployment rate, poverty reduction and sustainable economic growth.
The government’s expenditure and revenue policies are among policy instruments that can potentially play a significant role in achieving the ultimate goals of the Reconstruction and Development Programme (RDP).
But this year’s Budget centres around adhering to Gear’s specified fiscal policy regime – reduction of the size of the Budget deficit.
Three questions must be raised with this year’s Budget:
* Will lower fiscal deficit lead to the ultimate targets of the RDP?
* How is the deficit reduction achieved in the 1997/98 Budget?
* What are some of the implications of this year’s Budget?
The first question has been addressed in detail in previous articles of this series. The rest of this article therefore focuses on the last two questions.
From the 1997/98 Budget we are able to make the following observations as they relate to how the deficit reduction is achieved in this year’s Budget.
At the national level:
* When one compares this year’s revenue to the last, total revenue as percentage of GDP is left unchanged with no significant changes in the composition of revenue.
* In real terms, total government expenditure is expected to decline by 3,48%, from R176,070-billion in 1996/97 to R169,940-billion in 1997/98.
* Real deficit reduction of 25,8% (from R30,262 to R22,541-billion) will mainly be achieved through expenditure cuts. In fact, more than 85% of deficit reduction is owing to the cuts in expenditure.
* Cuts in the overall expenditure are mainly secured through significant reductions in capital expenditures.
Current expenditure is reduced by R884- million (a reduction of 0,62%), while total capital expenditure is cut by R5,62-billion (a reduction of 33,62% relative to last year’s Budget). The share of current expenditure in total expenditure is to increase from 89,5% in 1996/97 to 92,8% in 1997/98.
The share of capital expenditure, on the other hand, is to decrease from 10,5% of total expenditure in 1996/97 to 7,2% in 1997/98. (See note.)
* In terms of the budgets of government departments, seven out of the nine main departments have received real cuts in their budgets. The exceptions are the budgets for housing and welfare where their allocations have increased by 133% and 12%, respectively.
Some of the cuts in departmental budgets are severe. For example, budgets for health, land affairs, water affairs, agriculture, transport and education are cuts in real terms by 54,2, 17,8, 17,1, 15,2, 9,3, and 7,9 percentage points respectively. Most other departmental budgets have also been trimmed.
At the provincial level, examination of the White Books, presented by each of the provinces on their planned expenditure for the financial year, shows that most will have to tighten their belts too.
* Total financial allocations to nine of the provinces, where data were available, has been cut by 3% in real terms. Among the provinces, the Eastern Cape’s budget has received the highest cut of 9,9% relative to last year’s budget, while the Northern Province budget was cut the least by 1,6%.
Budget cuts of the other provinces fall within this range. Gauteng and the Northern Cape are the only two provinces whose budgets have increased by 4,2% and 1,4% respectively.
* Looking at the budget allocations for five of the provinces, where we have data on their current and capital expenditures for this year and last year, together their budget for capital expenditures has been cut by 14,1% while their overall current expenditure cut amounts to 1,93% relative to the 1996/97 allocations.
In the case of KwaZulu-Natal, while the budget for the current expenditure has increased by 2,55% relative to last year, the overall budget has been cut by 1,58%. This is owing to more than one-third cut in the capital expenditure budget.
The situation in Gauteng is different in a sense that the increase in the overall budget for the province of 4,2% is mainly going to a corresponding increase in current expenditure of 5,17%. The figure for the current expenditure growth is higher because the budget for the capital expenditures in the province is reduced by 6,5%.
* Interesting observations can also be seen in the composition of budgets for education, transportation, welfare, health, public works, agriculture, and local government.
The overall budgets of the nine provinces for education, transportation, public works and local governments have been cut, while allocations for welfare, health and agriculture have increased. However, all nine provinces have cut capital expenditures in all the above areas.
In terms of education, the allocations for seven provinces have been reduced, save for the North-West and Gauteng. Budgets for transportation of all provinces are cut in real terms, except in the North-West and Western Cape. The health budgets of six out of the nine provinces are cut. In the case of the welfare budget, the budgets of half of the eight provinces have been reduced.
Budget allocations for public works are cut for all the nine provinces in real terms. Except for a small rise in the Northern Province’s budget for local government and housing, the corresponding budgets for the other eight provinces is also cut significantly.
What are some of the implications of this year’s Budget?
* Elsewhere in this series concern was raised that the adoption by Gear of a fixed deficit/GDP target as its primary fiscal policy instrument is likely to result in the trimming of public investments than their expansion to a desirable level.
This year’s Budget validates this argument where there has been less than 1% cut in the overall current expenditure, while government’s capital expenditures has been cut significantly in real terms in order to adhere to Gear’s deficit/GDP ratio for this year.
If the Budget is an indication, Gear’s fiscal strategy that seeks to combine the achievement of a fixed deficit/GDP target ratio with an expansion of public investment levels is prone to disappointment, unless public investment levels are protected by an institutional mechanism that allows them to be planned in conformity with macro-economic needs instead of short-term budgetary limits.
* Given the relatively larger output and employment multipliers associated with government capital expenditure, the direct and indirect effects of this year’s cuts in such expenditures will be a reduction in government contribution to economic growth and employment.
This year’s cuts in the main government departments’ budgets also raises concern as to whether fostering redistribution through social and infrastructural investment is feasible under the current budgetary constraints and practices.
This should be of major concern in the South African context where achievement of sustainable economic growth is not possible without significant improvement in income distribution.
* Given that an objective of government policy is to attract higher private investment, a significant cut in government’s investment expenditure goes against all cross country evidence that higher public social and infrastructural investment it leads to higher private investment.
Furthermore, since there is no sign of reduction in the interest rate (and there has been more talk of an increase in the rate), it is unclear how the current fiscal policy is expected to attract private investment, even within the Gear framework.
* Elsewhere in this series it has been argued that South Africa is not over-taxed and that a fiscal policy to promote both redistribution and growth needs to increase the progressivity of the tax structure.
So far very little has been done in this direction with a result that planned total government revenue relative to GDP remains unchanged, leaving the burden of deficit- reduction policy on expenditure cuts.
The government’s role is to create access to social investment for those people inadequately served in the past. The private sector cannot be expected to provide the necessary public goods essential for shared growth.
Free markets consistently fail to provide adequate levels of education, health care, housing, and physical infrastructure, causing unemployment and poverty.
These results are derived from a data set where complete allocations of funds between current and capital expenditures were available