Under his immaculate suit Minister of Finance Trevor Manuel was most probably wearing a Che Guevara T-shirt when he presented the Budget to Parliament this week.
While Manuel has clearly not gone back to the Guevara-like economics once espoused by the African National Congress, in the past three to four years his stance has shifted toward a recognition that the state must play a bigger role in the economy in developing countries and must step out of the strait-jacket determined by global macroeconomic orthodoxy. He is a market-oriented finance minister, but he is no longer a believer in the dictum that the free market will deliver jobs, growth or social development.
His Budget speech made liberal reference to the Reconstruction and Development Programme, the ANC’s first -— and most popular -— economic policy; all mention of the conservative macroeconomic policy, the growth employment and redistribution strategy (Gear), was excised from his account of 10 years of ANC fiscal history.
In Wednesday’s Budget, Manuel took social spending up to levels unprecedented in his eight-year term — it now accounts for more than half of all expenditure and is part of the effort to build a social security net. It will take several more years of real high spending to catch up with the backlogs caused by the spending cuts that Gear demanded, but this Budget marks the most decisive shift yet in spending priorities.
Spending on most votes -— excluding land and housing -— increased in real terms. Provincial housing departments failed to spend almost R1-billion of their budget last year.
An estimated R19,6-billion will be spent on public works in the next four years to halve, by 2014, the expanded unemployment rate of 40% of economically active South Africans.
It was a Budget not geared to the markets, but one that dwelled on the vulnerability of the poor more than in previous years. Talking about a study of poverty in KwaZulu-Natal, Manuel said: “Income security can be overturned in many unpredictable ways — these kinds of vulnerability hurt families and especially children not just once but in recurring ways, not just through distress or hunger, but in wounded minds and fractured communities.”
Apparent from the Budget is a much bigger social and economic role for the state than the ANC has planned for in previous Budgets. Privatisation as a source of revenue plays a much-diminished role, while parastatal investment in infrastructure is instead seen as vital for economic growth.Since 2001 Manuel has flagged the need for sovereignty in the globalisation era, suggesting that the Washington Consensus set of neoliberal economic policies should not be applied uncritically.
“We have to push hard for policy room and democracy against the mediocrity and risk of ‘one-size-fits all’ globalisation,” Manuel told a Human Sciences Research Council meeting last year.
Whereas the Congress of South African Trade Unions (Cosatu) was routinely disappointed by the Budgets between 1996 and 2000, it welcomed the 2004 Budget, saying it vindicated the decision to put its weight behind an ANC victory in the next election.
The People’s Budget coalition, which includes Cosatu, churches and civil society, said tax rates were not high enough; and that the government needed to spend more than R15-billion over five years to make a sizeable dent in unemployment.
Economist Asgar Adelzadeh of the United Nations Development Programme said the comparison with Che “seems a bit of a jump to me. Icons should make themselves.” For him, Manuel still had some work to do, most notably on monetary policy. The relatively low inflation target impedes growth, says Adelzadeh.
Still, the most vulnerable got the most from the budget: more than 60% of the R4-billion in tax cuts (down from R13-billion last year) went primarily to the working class as did the reduction in property taxes.
Properties to a value of R150 000 will not be liable for transfer tax, a move to encourage a property market at the lower end of the income scale. Six million children younger than 14 should get the child support grant of R170 a month by 2007, at a price-tag of R1,4-billion a month.
Child support grants and old-age and disability pensions make up the most expensive line item this year and are expected to grow at a rate of 13,6% a year over the remaining two years of this Medium Term Expenditure Framework (MTEF).
“Given the challenges we face, we have made these choices. But in the longer term, it seems clear that we will need to seek a better balance between growth in welfare spending and our investments in education and infrastructure development,” said Manuel.
But, despite his expansionary stance and shift in emphasis, Manuel remains a cautious finance minister.
The budget deficit is projected to rise to 2,6% of gross domestic product this year and 3,1% next year, declining to 2,8% in 2006/07 — in line with global benchmarks; interest payments on debt fell to 4,7% last year from 6,4% in 1996. And in addition, the strong rand saw the staunching of the trend of higher and higher taxation income — it is not a gap that Manuel will fill with the deficit spending for which Che Guevara (also a finance minister) was famous.
In Manuel’s previous speeches he has drawn on the works of many great writers like the Nobel laureate Amartya Sen, whose writing pivots on the notion that development is freedom, and the philosopher Richard Rorty, whose work on solidarity he quoted two years ago.
“Solidarity,” wrote Rorty, “is not discovered by reflection but created. It is created by increasing our sensitivity to the particular details of the pain and humiliation of other, unfamiliar sorts of people.”
This year, Manuel chose the work of the economist Joseph Aloise Schumpeter, a failed Austrian finance minister but brilliant economist, whose most quoted line from his 1942 book Capitalism, Socialism and Democracy is: “Can capitalism survive? No, I do not think it can.”
It was, he believed, a system under fatal attack from intellectuals (Marxism was in its heyday) and from staid practice. Instead, he believed in the spirit of the entrepreneur.
This year’s Budget is no paeon to black economic empowerment (BEE) and seems to support instead an entrepreneurial class. Only R1-billion goes to BEE, rising to R6-billion over the period of the MTEF.
“The funds set aside will be used within the framework of this Act to finance medium-sized transactions where ownership is being broadened and value is being added.”
With shades of Che, Manuel has also scrapped the tax on employee share ownership -— “the means of production shall be owned by those who work it”.
On display this week was also a minister less patient with capital. Since his baptism of fire from the markets, Manuel has played a careful hand, harnessing support from business both by his quick study in his post and by keeping company taxes steady.
This week, his tune changed. “In analysing corporate taxes, it is clear that the low effective tax rates in certain sectors remain a cause for concern.” Structured finance deals in the mining and financial service sectors are being scrutinised; a revelation that earned a tut-tut from the Chamber of Mines, which reminded the government of its contribution to the economy.
“The mining sector constitutes 40% of the market capitalisation of the JSE [Johannesburg Securities Exchange] and is the dominant magnet for the attraction of the investment to South Africa.”
Under another revolutionary, the talk might have been of nationalisation, not of higher taxation.