The government made a calculated gamble of over R30-billion this week to accelerate growth and begin to weld together South Africa’s two economies — a first of high skills and decent work and a second of informal work and extreme vulnerability.
The Medium Term Budget Policy Statement (MTBPS), presented to Parliament this week by Minister of Finance Trevor Manuel, marks a clear shift in the government’s economic growth and social development policy.
The priority now is to move the unemployed and unemployable into the formal economy, rather than simply provide communities with access to essential services they cannot afford on a sustainable basis.
In the past month, the two-economy theory has come to dominate policy discourse, with President Thabo Mbeki using the analogy several times; it is also a central feature of the government’s 10-year review of its performance since taking power in 1994.
“We have a policy framework in place to bridge the divide between the first and second economies that is still such a pervasive feature of our society,” said Manuel.
The government’s determination to bridge the gap between the country’s two economies is evident in its willingness to put its money where its mouth is, this week’s announcement brings spending for the 2004/05 financial year to more than R330-billion.
It is a calculated gamble because additional income will come from a higher deficit and more direct state involvement in the economy. If it pays off, South Africa may be rewarded with a period of strong economic growth; if it fails and the poor are not brought into the mainstream of South African economic life, the country faces a future of increasing social and economic instability. South Africa’s expanded unemployment rate of more than 41% of working-age adults is threatening to become structural.
The spending plans have been described by Congress of South African Trade Unions economist Neva Makgetla as “quite wonderful”. Manuel added R37-billion to the spending purse on Wednesday, to fund primarily the public works programme and a growing take-up of the child support and disability grants, among other smaller items.
The budget policy statement commits the government to spending on social development and poverty alleviation programmes, even as significantly slower than expected economic growth and the resultant cut in its tax revenue forces it to run-up the deficit.
To date, the government has been grimly determined to keep a tight hold on the country’s purse strings, limiting spending on poverty alleviation and social development programmes even at the cost of its political capital among its key constituencies, workers and the poor.
Head of the policy coordination and advisory services in the Presidency, Joel Netshitenzhe, says the MTBPS marks a “new trajectory” in South Africa’s social and economic development.
He says the ten-year review points out that many of the improvements the government has been able to introduce into poverty-stricken communities — like better access to essential services — will be “discounted” unless people have jobs that will allow them to use and sustain these services.
And, although Netshitenzhe is reluctant to speak of the state becoming more “interventionist” in the economy, he concedes that the government is going to have to take more direct action to bridge the gap between the two economies — witness the budgets for labour-intensive public works as well as R10-billion over five years for black economic empowerment.
“Because a thriving first economy does not impact on the second economy, we cannot rely on the market to solve this [unemployment] problem,” says Netshitenzhe. He emphasised that partnerships with the private sector are an important part of the government’s social and economic development plans. The rand strengthened on the back of the budget policy statement, indicating that the market has accepted the gamble.
Manuel called his budget “fiscally responsible” and “growth-oriented” — a balance he must maintain. The formal sector must thrive if it is to be a source of revenue for the government and jobs for the unemployed, says Netshitenzhe.
Standard Bank chief economist Iraj Abedian says South Africa has moved through two economic phases and is now entering a third. The first was economic stabilisation; the second was the stabilisation phase where economic reforms are “institutionalised — not rammed down the throat of a country” while this week’s budget statement marks the start of an “expansionary phase”.
“It’s a process not an event and a justified acceleration rather than political posturing. The markets would have penalised [posturing],” says Abedian.
Will the gamble pay off? The biggest risk factor lies not outside, but within the government. The civil service may not have the capacity to spend the new injection of funds.
In his speech, Manuel revealed that R1,1-billion in unspent funds was rolled over in the past financial year; and this year underspending is running at R700-million.
Nonetheless, the government has continued to increase spending allocations to provinces and municipalities in order to redress free basic service and infrastructure backlogs. The public works programme will be managed and implemented by the provinces, raising the spectre of long delays in what is planned as a short- to medium-term trajectory.
Municipal government is another risk factor. South Africa’s 284 municipalities on average raise 92% of their own revenue, yet they are responsible for delivering many of the national government’s social development and poverty alleviation programmes — like free basic services.
Although the MTBPS states that the spending shifts to provincial and local government are key to the “progressive realisation of social and economic rights”, municipal debt stands at more than R25-billion. Local councils have been accused of using their capital budgets for operational expenditure.
The MTBPS itself acknowledges these challenges alongside rising personnel costs, water and electricity losses and outstanding service payments. Treasury Deputy Director General Ismail Momoniat said there were serious spending challenges across all three spheres of the government.
Still, the big-ticket announcement this week is a huge leap of faith for the government. While Manuel emphasised the stability of economic policy, the public works programme also symbolises a government that will leave less to the markets and intervene more to secure economic growth and political stability by welding together the two economies.