Howard Barrell
The praise heaped on Minister of Finance Trevor Manuel for his budget by the African National Congress and its alliance partners relied upon the government’s determination to delay until after the election a number of politically awkward economic decisions it knows it must take soon.
The South African Communist Party and the Congress of South African Trade Unions (Cosatu), the ANC’s allies, heaved a sigh of relief that Manuel did not announce plans for more energetic privatisation, for far tighter government spending and to force through deep staffing cuts in the bloated civil service. But, like deregulation of the labour market, these are major items on the finance minister’s and the government’s agenda for this year and next – and issues on which opposition parties to the right of the government are calling for immediate action.
The SACP praised the budget, suggesting “it prioritises service delivery to the poor and the creation of new poverty relief and employment creation programmes”. It was another “decisive step in the ongoing transformation programme of the ANC-led alliance”.
But the SACP said it was “not persuaded that a reduction in company tax from 35% to 30% is warranted” – a move intended by the government to encourage investment and re- investment in South Africa and, with it, the creation of more jobs in the private sector.
The SACP also said that, while it welcomed the benefits to low earners of the tax cuts announced, it felt top earners were still not carrying enough of the tax burden.
Cosatu commended the budget’s protection of social security spending and Manuel’s “flexibility” in allowing total government expenditure to exceed – marginally – the original budget deficit spending target for last year of 3,5%. The deficit came in at 3,7%.
The budget therefore left the alliance looking united in the run-up to the elections, likely in May. But there is disquiet in SACP and Cosatu ranks over policy directions foreshadowed in some of Manuel’s remarks in his budget speech.
Manuel signalled his impatience with the government’s inability so far to reduce the size of South Africa’s overstaffed civil service.
The government has delayed for some years introducing a legal model to enable it to fire unneeded civil servants and surplus personnel in the defence forces. There are, for example, an estimated 54 000 civil servants who are not needed and have no job to do but who continue to be paid.
Manuel said the growing civil service wage bill now accounted for over half of all government spending (excluding interest payments on government debt). It was “urgent” that there be “further restructuring of the civil service”.
A related government intention signalled by Manuel is a sharp tightening of spending practices within government departments. This could also result in job losses there. Legislation and a system of regulations have been drawn up to create clearer lines of answerability and control over public spending, of which the centrepiece is a Treasury Control Bill. But concrete action on this policy direction has been held up over the past year.
A third issue – skirted by Manuel in his speech, but not by opposition parties in their responses to him – is South Africa’s huge debt service burden, its role in keeping interest rates high, and the role aggressive privatisation, anathema to the ANC’s allies, can play in lessening that burden.
Although South Africa’s debt burden itself is at internationally respectable levels – just under 58% of gross domestic product – servicing it is extremely expensive because of the country’s existing high interest rates.
Nearly a quarter (22%) of all government spending is currently going to service this debt. This high servicing cost tends to keep taxes up and, also, prompts the government to borrow more money than it would otherwise do to help it service the debt. This creates more demand for money, which drives up the cost of borrowing, namely interest rates. And this, in turn, depresses the prospects for economic growth and job creation.
Opposition parties – and a number of economists within the ANC and the government – suggest revenues from privatisation can be used to reduce the debt burden, so to reduce interest rates, and so help make a vicious circle virtuous.
Democratic Party finance representative Ken Andrew said the result of Manuel’s budget would be “a crowding out of the private sector and fixed investment potential, to the detriment of job creation and poverty alleviation”.
The New National Party’s Dr Theo Alant commented: “If the ANC had the political will to keep the SACP and Cosatu with their outdated and restrictive socialist demands at bay, the country’s economy could have surged into a sustainable growth curve by now.”