Budget ‘to hold line on spending’

Next week’s Budget will increase state spending on social and economic development programmes and job- creation initiatives while trying to ease the country’s personal tax burden — despite a shortfall in the revenue it is expected to receive in the coming year.

This is the key prediction for Minister of Finance Trevor Manuel’s 2004 government spending plan, due to be unveiled in Parliament on Wednesday.

The government’s expenditure projections for the coming year and the amount of revenue it expects to receive, mainly from taxes, are detailed in the Medium Term Budget Policy Statement (MTBPS) released in November last year, which outlines the government’s spending plans for the following three years.

Chief economist at the Industrial Development Corporation Lumkile Mondi points out that the government has been consistent in its fiscal policies to avoid springing any surprises on the notoriously skittish domestic and international investor communities and global financial markets. As a result, the MTBPS is usually an accurate indicator of its spending plans.

President Thabo Mbeki underlined the government’s determination to stick to its economic and social development policies when he insisted in his State of the Nation address to Parliament this week that “we do not foresee that there will be a need for new and major policy initiatives” after the April 14 election.

“The 2004 Budget will contribute to a recovery in economic growth, primarily through sustained levels of infrastructure spending and a sharp focus on job creation,” the MTBPS states. According to the policy statement, the 2004 Budget should see a real increase of 5,7% in government spending in the coming year.

The money would be spent on “employment creation, in part through the expanded public works programme; initiatives to combat the spread of HIV and Aids, including roll-out of the government programme to make anti-retroviral drugs available to those in need; the further extension of government’s social grants programmes; the further extension of the provision of free basic services to poor communities; improving capacity in the safety and security sector, and improving the quality of school education.”

The MTBPS estimates that government expenditure in 2004 and 2005 will be about R330,4-billion. Of this, an estimated 22,9% (R75,5-billion) will go to education; health care will get 13,1% (R43,4-billion) and welfare and social security will get 16,8% (R55,6-billion). Defence will receive 7% (R23,1-billion) of the Budget, and justice, police and prisons 12% (R39,7-billion).

About 14,3% (R47,1-billion) of the Budget is earmarked for “economic services and infrastructure”. This includes grants for building and maintaining roads, the extension of free water and electricity to the needy and R6-billion for black economic empowerment (BEE) and land reform.

Administration will get 8,3% (R8,5-billion) of the Budget. This includes allocations for the Department of Home Affairs, the next general and local government elections, South Africa’s support for the New Partnership for Africa’s Development and the development of the country’s foreign economic policy.

The policy statement also indicates that the government will continue to try and cut the country’s per- sonal income-tax burden. “Personal income-tax relief to compensate for the effect of inflation should again be possible, and various technical refinements of the capital gains system and the worldwide income-tax regime will be proposed. The review of the retirement-fund tax and the appropriate tax treatment of alternative saving instruments will continue into the next year,” says the policy statement.

Mondi is optimistic that the government will reduce taxes on retirement funds in an effort to encourage South Africans to save, and in doing so increase the pool of money in the country available for investment.

Slower-than-expected economic growth and lower-than-expected tax receipts from manufacturing and mining companies will not put a crimp in government’s spending plans, he believes.

The strong rand has made South African manufactured goods and commodities more expensive and less competitive on international markets, where there is already weak demand for products because of the fragile state of the world economy. Statistics South Africa released figures this week showing a 2,3% slump in manufacturing production in South Africa in the past year.

“We also are skeptical about things picking up for South Africa this year because the European economic recovery seems to be lagging far behind that of the United States,” Mondi said. Europe is South Africa’s main trading partner and accounts for 35,3% of the country’s total exports, according to the MTBPS.

Mondi’s view is that while the chance of significant economic growth may be minimal this year, things are likely to pick up beyond 2004, when the government’s spending on the R100-billion Expanded Public Works Programme and other initiatives begins to feed into the economy. The MTBPS puts economic growth for 2003 at 2,2% and forecasts 3,3% in the coming year.

However, Mondi believes that even though less tax money will be flowing into the National Treasury, Manuel will — somewhat cautiously — let the Budget deficit drift upwards rather than reduce his spending plans and tax cuts, which are vital to keeping the country’s economy growing and creating jobs.

“In recent years, the government has managed the Budget so tightly that we have room to borrow more without damaging our credibility with international investors,” Mondi says. The policy statement indicates that the government had planned to let the deficit grow to 3,5% of gross domestic product from a revised figure of 3,3% for this year.

Mondi does not buy into the theory that Manuel will unveil an election Budget. He points out that with a substantial victory almost certainly in the bag, the African National Congress has no need to come up with a popular Budget to boost its chances at the polls.

But it needs to maintain its reputation for capable management of finances in the domestic and international investor community.

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