Howard Barrell
Minister of Finance Trevor Manuel played the ball deep into the private sector’s court with his budget speech on Wednesday. He showed that he had succeeded in getting the public finances into their best shape in decades and in creating an outstanding environment for business to take the economic lead, to invest for growth and create new jobs.
His budget was further affirmation of his and President Thabo Mbeki’s commitment to the market-friendly policy for growth, employment and redistribution (Gear), which is anathema to many of the government’s left-wing allies.
The argument underlying Manuel’s speech was that economic growth is the way to help millions of South Africans out of poverty and into productive work; the government has done all it can to promote growth, namely create a climate that is conducive to growth; and it is now up to local and foreign businesspeople boldly to take advantage of the opportunities on offer.
But this approach, according to Waren Krafcik, head of the budget information service at the Institute for Democracy in South Africa, leaves Mbeki and Manuel exposed politically.
“If Gear does not deliver, or does not deliver on time, Mbeki and Manuel don’t have much of a hedge,” he commented.
While there were sizeable tax cuts for the employed in the budget, Krafcik drew attention to the fact that there was little for the unemployed and other vulnerable strata. Old-age pensioners were the exception. They received a small rise.
In view of his degree of political exposure, Manuel’s decision to introduce a capital gains tax from April next year may have been a particularly deft touch. This tax – a tax on the surplus obtained from the sale of an asset for more than was originally paid for it – is usually seen as a tax on the rich. Manuel’s announcement of his intention to introduce it made his budget marginally less vulnerable to attack from left-wingers in the Congress of South African Trade Unions and the South African Communist Party.
In other quarters, the government’s approach drew warm praise. Some economists and commentators verged on the ecstatic, believing that South Africa had increased its lustre among emerging markets and that the budget had upped pressures on international ratings agency Standard & Poor’s to raise South Africa’s creditworthiness to investment grade. S&P’s new rating is due out on February 28.
Iraj Abedian, chief economist at Standard Bank, described Manuel’s budget as “absolutely dead right, right-on”, adding: “It has consolidated his credibility and that of the Mbeki presidency in the markets.”
Abedian’s enthusiasm also reflects the markets’ satisfaction with the inflation target Manuel set – a band of between 3% and 6% to be achieved by the end of 2002. They believe it was neither unrealistically low nor indicative of a lack of will to bring down inflation from its current core level of 7,7% a year. Instead, the target reflects the kind of prudence for which Manuel has become known since Gear’s introduction in 1996. Manuel, like the markets, knows that the income tax breaks he announced on Wednesday could be slightly inflationary, making the price spiral more difficult to tame, hence the generous upper level on the band.
On Wednesday, Manuel also echoed tough signals coming from within the Department of Public Service and Administration. He is ready to join battle, if necessary, with trade unions to restructure the civil service and reduce the proportion of government spending taken up by personnel costs – about 51%, if interest payments on state debt are excluded from the calculation.
He warned that this restructuring and reductions in recurrent personnel expenditure would “intensify”. And he announced that the proportion represented by personnel costs was, after four years of growth, finally showing signs of decline this year.
Ken Andrew, finance representative of the Democratic Party, warned the budget means that South Africa is due to see an increase – not a decrease – in the number of people without jobs in the next three years. He points out that government projections put economic growth at about 3% per annum over the next three years – well below the 6% needed to begin to reduce the unemployment rate seriously.
Andrew blames this inadequate rate on “limpness” in the government on programmes such as privatisation. Manuel said on Wednesday that the government’s privatisation programme would realise only R5-billion in revenues in the new financial year, increasing to R10-billion per annum two years later in 2002/03. According to Andrew, a more aggressive privatisation programme would enable the government to reduce state debt more sharply now and release more money to fuel the higher levels of growth needed to begin to reduce unemployment.
But Andrew, like other politicians of all parties, welcomed Manuel’s focus on small businesses, which got a hefty set of tax reductions. Small and medium enterprises – as opposed to big business – are seen by most economists as the institutions that must create the millions of jobs needed to bring unemployment down to acceptable levels in South Africa.
There is a feeling that, although it remains publicly committed to its growth estimates of about 3% for each of the next three years, the government is – quietly – hoping that it could rise significantly above that.