Govt sticks to guns on spending

The government is to stick to its expansionary fiscal policy despite slower than expected economic growth this year.

In an interview last week, Kuben Naidoo, of the Budget Office of the National Treasury, said fiscal policy would be maintained “in a way that is sustainable in the long term”.

This year’s budget made provision for real, non-interest government spending to rise by about 5%, and the government is set to maintain this pattern.

Naidoo was speaking ahead of the Medium Term Budget Policy Statement (MTBPS), which will be presented to Parliament by Minister of Finance Trevor Manuel on November 12.

The MTBPS sets out the government’s spending plans for the next three years and updates its economic forecasts. The main aim is to provide investors with a clear idea of fiscal policies and economic forecasts for the medium term.

For the first time in several years the government’s revenue is under pressure. Owing to lower than expected economic growth and the global economic slow down, corporate taxes are also set to come in below expectations.

The government forecasts growth of 3,3% for this year, and is likely to revise this downward. The market consensus is that growth will come in at 2,2%.

Revenue from personal income tax and Value Added Tax is slightly above target. However, the revenue shortfall is likely to be very small and “nothing to lose sleep over”, says Naidoo.

According to the 2003 Budget, the government is aiming to collect R304-billion this year.

Despite the looming shortfall, it is also trying to stabilise the ratio of tax to gross domestic product (GDP). “The tax burden has drifted up in recent years despite significant tax cuts, and we think we should stabilise the tax regime,” says Naidoo.

In the 2003 Budget, the Treasury predicted that the tax-to-GDP ratio would stabilise at between 24% and 25% over the next three years.

More spending and less revenue means the government will have to ease its grip on the deficit. However, this is not a prospect that worries Naidoo too much. “We feel we can increase the deficit moderately to cushion the economy against the present global slowdown. We look to the debt servicing cost, as a percentage of GDP, as the main indicator of fiscal policy.

“As long as our debt service costs are trending downwards in the medium to long term, when the economy slows we are happy to increase borrowings. When the economy accelerates, we can reduce borrowings.”

Naidoo says the government’s debt servicing costs are likely to be lower than expected because of falling interest rates and the stronger rand. Inflation is also lower than expected, allowing for real growth in expenditure, with less money.

The 2003 Budget aimed for a deficit of 2,4%. “My sense is that it will be very close,” says Naidoo.

New spending priorities for the government are likely to include programmes to increase employment, says Naidoo. Among them would be the expanded public works programme, announced by President Thabo Mbeki, and provision for the political and financial commitments the government made at the Growth and Development Summit.

At the summit, in June, business, labour and the government agreed to try to halve unemployment by 2015. The official unemployment rate is 29,5% of the economically active population, but the figure rises to 41,2% if unemployed people who have stopped looking for work are included.

Another priority will be funding for the roll-out of the planned comprehensive treatment programme for people living with HIV and Aids. Last year’s MTBPS provided R3-billion over three years to help the provinces cope with the effects of HIV and Aids, and to provide treatment for pregnant mothers and rape survivors.

Perhaps surprisingly, given the government’s long-standing efforts to slim down the public service, the MTBPS is likely to provide for an increase in the number of people employed by the state and its wage bill, with an eye to improving service delivery to communities.

The health and criminal justice systems have been earmarked for more and better-trained personnel.

Provision has also been made for salary increases roughly in line with inflation in the public service as a whole. “On aggregate, we should see public service employment increase by about 1% a year, mainly in the health and criminal justice systems. If the wage bill grows by between 2% and 2,5%, but the budget as a whole is growing by 4% in real terms, personnel costs as a share of expenditure will still fall — freeing more funds for infrastructure development,” Naidoo says.

The government will also continue building on the priorities of the past — infrastructure development, the expansion of the social security system and the provision of personnel and non-recurrent expenditure for education and health.

Until recently, a major snag has been provincial and local governments’ inability to spend the money allocated to them for development programmes.

Naidoo is confident past spending bottlenecks have eased.

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