It is near Gospel in government circles that the tough macro-economic policy choices embodied in the growth, employment and redistribution (Gear) strategy have purchased space for a sustainable expansion in government spending. But the limits to that particular line of credit are now starting to show themselves.
Massive new capital investments, unhindered growth in social welfare transfers, and a highly public delivery schedule for government departments are beginning to push hard against the National Treasury’s commitment to fiscal rectitude.
This week’s Medium-Term Budget Policy Statement added R50-billion to three-year estimates of government expenditure announced in February’s Budget, and Minister of Finance Trevor Manuel’s staff is clearly concerned about the implications of a widening fiscal deficit. Debates within the government and the African National Congress over the direction of economic policy may not yet be faultlines, but the mini-Budget shows a number of hairline cracks.
Approximately R21-billion of the new spending is accounted for by unexpected increases in social welfare outlay — particularly growth in the uptake of disability and foster-care grants. According to Manuel, the 36% average growth in foster-care payouts last year, and similarly rapid increases in disability grant spending, may have been partly attributable to a rash of fraudulent claims, but the increasing burden of diseases like HIV/Aids and TB also plays a role.
The Medium-Term Budget Policy Statement is even more explicit:
”The caseloads of public hospitals and clinics reflect, amongst other factors, the rising burden of HIV and Aids-related diseases. Unemployment and social dislocation impact on crime and household insecurity. Social welfare services are unable to respond adequately to the range of needs and distress that confront them.”
Plans are being developed to tighten administrative control of the grant system, but Treasury officials concede that it is not yet clear how much of the problem stems from fraud, and how much from the demographic changes, including a growing population of orphans, wrought by HIV/Aids.
While the centralisation of the grants system in a single national agency is expected to improve control over spending, there are serious concerns within the government over whether the Department of Social Development has the capacity to bring spending under control.
”They’ve turned a blind eye so far,” one senior official told the Mail & Guardian, ”there’s no guarantee that that will change just because we have a national agency.”
At the same time major new spending on infrastructure for services and to ease bottlenecks in the national transport system is expected. It is this growth-enhancing investment that Manuel wants to see taking a larger share of state funding, but while the mini-Budget makes new cash available for roads and public transport, it makes no provision for state contributions to the R165-billion initial round of investment in elec- tricity generation and transport capacity announced by Minister of Public Enterprises Alec Erwin.
As the M&G reported last week, that programme, and the second tranche that follows, may well require public money to supplement what parastatals, the bond market and private investors can provide. For example, initial public offerings or sales of some Transnet subsidiaries will require balance sheet restructuring that will probably be impossible to achieve without a new injection of funds.
Even with- out account- ing for more spending in this area, the Budget deficit is expected to widen to 3,5% in 2005/06, an amount sharply higher than Manuel has previously been prepared to countenance, and that projection relies to a certain extent on sustained growth in demand for exports from Europe and China.
Should the fragile recovery in the eurozone falter, or China suffer an abrupt decline in fortunes, local economic growth will suffer and deficit projections deteriorate.
Furthermore, as Sanlam chief economist Jac Laubscher points out, the current highly stimulatory fiscal and monetary policy approach leaves little scope for adjustment if economic conditions turn nasty.
During a press conference ahead of his mini-Budget speech in Parliament on Tuesday, Manuel was at pains to point out that the widening gap between revenue and expenditure was manageable, and strongly implied that he had not caved in to pressure from left voices in the tripartite alliance who have long called for a more relaxed fiscal approach.
”I know some people will be very happy. They’ll say look at this, they’ve now come round, we finally have a very big deficit. But we don’t see glory in debt. Our focus has been on providing for needs of government on the basis of what we can tax,” he said, stressing that the success of macro- economic stabilisation under the Gear strategy had created the room for a more expansive policy.
It seems certain, then, that overall levels of taxation in the economy will have to increase. The tax burden, which is generally regarded as a constraint on growth, is already creeping closer to the 25% level that the treasury prefers to treat as a ceiling; new tax proposals are set to increase the revenue take, and the mini-Budget all but rules out cuts in the near future.
Where industrialised countries face a rising tax-to-gross domestic product ratio as a result of ageing populations, South Africa has to deal with poverty, Manuel explained.
Lest this sound as if he really had been forced leftward, he followed it up with a quote from Cicero that might have been abstracted from Gear: ”The national Budget must be balanced, the public debt must be reduced, the arrogance of the authorities must be moderated and controlled, payment to foreign governments must be reduced if the nation doesn’t want to go bankrupt. People must again learn to work instead of living on public assistance.”