Budget 2004 was “growth-friendly”, without necessarily acting as a direct spur to economic growth, a key economic analyst said on Thursday.
Iraj Abedian, chief economist of Standard Bank, observed that growth was ultimately driven by forces like the global economy.
While welcoming the R4-billion tax relief provided by Minister of Finance Trevor Manuel, Abedian warned that three months of a strong rand and relatively high interest rates would erode the effects of this cash injection.
In similar vein, Rejane Woodroffe, international investment economist at Metropolitan Asset Managers, argued that the government was on the right course but, particularly in regard to job creation, had not been bold enough. “Considering where the economy is, I think more could have been done,” Woodroffe said.
The Budget’s main gesture in the direction of employment creation had been the expanded public works programme, which will pump R19,6-billion into the economy over four years.
Woodroffe noted that South Africa’s manufacturing sector had bled for most of last year because of the strong rand, while agriculture had suffered from adverse weather conditions. In contrast with the Treasury’s growth projection of 2,9% in 2004/5, she did not expect economic growth to reach 2%.
She argued that relaxation of exchange control would have the effect of weakening the rand and galvanising economic activity, while attracting investment.
At a media briefing in Cape Town, Manuel conceded that because of lower growth and therefore revenue in the last tax year, the government had been forced into a trade-off between taxes and spending.
Woodroffe suggested that the government could have cut taxes more aggressively. Interest-rate cuts took up to 18 months to feed through to the economy, with the result that the effects of the most recent cut would not yet have been felt this year.
As government departments had a track-record of underspending, state resources would have been better used to boost the spending power of the South African public rather than lying unspent in the coffers of the bureaucrats.
Woodroffe also noted that the consumer spending power that would result from the Budget’s tax cuts would be undermined by the loss of jobs in export sectors. Growth and consumer spending would not continue indefinitely while major industrial sectors were shedding employment, she said.
On job creation, Woodroffe said that the one-million jobs from the extended public works programme were not sufficient to address South Africa’s structural unemployment crisis. “Part of the problem is that over the past 10 years, the economy created a million jobs while the labour force has grown by five million.”
However, the trend towards public-private partnerships in infrastructure projects provided some hope. This year’s Budget allocates an additional R3,2-billion for public works and infrastructure development.
Abedian said that although the infrastructure upgrade would create jobs, these would largely be for skilled and semi-skilled workers, not the unskilled majority.
The earmarked infrastructure projects in the Budget include an allocation of R1-billon for the upgrade of the Durban port pier and R3, 2-billion for the port of Coega in Port Elizabeth.
The Department of Trade and Industry also runs a range of job-supporting initiatives. These include the Small Medium Enterprise Development Programme which, according this year’s national expenditure estimates, has supported 980 firms and created 30 000 new jobs in the manufacturing economy.
Asked why the Budget contained no measures to stimulate small business, Manuel said that money had been allocated. However, the problem was not so much the availability of funds as the mechanisms and institutions that dispensed them.
“We were terribly let down [by the banks],” he said. In particular, the banks had continued with normal lending practices to small firms, despite the guarantees received from the department’s Khula agency.
Under the new Financial Sector Charter, Manuel warned, private lending institutions could not continue operating in this way.
The deparment also runs a Critical Infrastructure Programme, which supports seven projects including industrial development zones in Richard’s Bay and Coega. This currently leverages investments of R850-million.
To spur longer-term investment, Manuel announced that exchange-control regulations would be modified to cater for inward listings by foreign companies and raise potential borrowings by foreign undertakings in South Africa.
In his speech the minister said the purpose was to reinforce South Africa’s role as a financial hub for the continent.