Finance Minister Trevor Manuel makes a virtue of being boring in October, when he updates his spending plans and economic projections in the medium-term budget policy statement (MTBPS). But there are clear signs in this year’s list of incremental changes that he is preparing the ground for the major policy statement to come with Phumzile Mlambo-Ngcuka’s ”accelerated and shared growth initiative” in the new year.
This will shift focus away from macro-economic management toward the restructuring of the real economy through infrastructure investment, a more robust industrial strategy, labour market and regulatory reforms, and a renewed focus on redistribution.
Much of this has been on the cards since 2001, when ”microeconomic reform” proposals were first floated. But the current proposals seem more far-reaching and, despite the distractions of the African National Congress succession battle, more energetically directed by the presidency.
The current economic climate certainly leaves more room than usual for policy manoeuvring.
So much cash is churning through the economy — and into the fiscus — that government spending cannot catch up. According to the MTBPS, listed companies’ profits are up 40% for the five months to August, and corporate tax revenues are up 29%.
VAT receipts — a reliable indicator of economic activity — are up 22% and the construction industry is about to exhaust cement-producing capacity. ”We’re hitting the sweet spot and you can see it in the figures,” Manuel told journalists in Parliament.
Indeed, the R30billion in unexpected tax revenue is in some ways an embarrassment of riches.
The budget deficit will be just 1% of gross domestic product (GDP) this year. By 2008, with a major infrastructure investment programme well under way and social spending peaking, it will have crept up to a still conservative 2%, the Treasury predicts.
Traditionally, a 3% deficit is seen as the upper limit of prudent fiscal policy, but many rich countries now regularly breach that threshhold in pursuit of economic stimulus or political gains.
Labour, and other critics of the tight macro-economic policy approach that marked Manuel’s first six years in office, have long argued that higher deficit spending is essential to spurring economic growth and creating jobs.
Manuel points out that capacity constraints — such as a shortage of civil engineers — make it hard to spend faster. But the real clue may have come from his deputy, Jabulani Moleketi, who suggested that deficits could be measured over the full three-year, medium-term expenditure framework.
On current projections, that number comes in at an average of 2,1%, despite real spending increases of over 5% in most state departments. Was Moleketi hinting that the numbers may be adjusted as plans to push growth past 6% take shape?
Certainly Manuel was at pains to sell this approach — still very much under wraps — in his speech to Parliament, punting the familiar argument that investment in economic infrastructure ultimately has welfare benefits, but adding, less characteristically, that social spending can unlock growth.
”Accelerated growth … makes the redistribution of wealth and income possible. It is the dynamic that underlines employment creation. It is the source of increasing revenue collections and the resulting expansion in public services,” he said. ”But the causality also runs the other way. Investment in people’s capabilities, housing, water services, electrification and our second economy are also necessary growth-enhancing initiatives.”
Another sign of caution is the apparent decision to let the total tax burden on the economy drift north of 25% of GDP, a mark the Treasury has always tried to stick to. The concern has been that increasing the overall tax burden will dampen economic growth by reducing profits and incentives to invest.
The tax-to-GDP ratio will hit 25,9% this year and is expected to hover close to that until at least 2008.
Officials are coy about whether the medium-term projections take into account any tax cuts to be announced in February. ”We’ll have to look at it and draw some lessons, but now is not the time to announce changes,” said deputy director general Ismail Momoniat.
There are two possible reasons for the higher tax burden: either the treasury wants to keep a little fat in the system in case tax cuts are needed to stimulate a cooling economy, or the accelerated growth strategy will require more substantial growth in state spending.
Manuel indicated on Tuesday that February’s Budget will include personal tax relief. But he was cool on the idea of corporate tax cuts.
”The common wisdom would be that, if we cut corporate rates, businesses behave differently, creating more employment and all those good things. I am less sanguine about the speed with which you get all this behavioural change,” he said.
There are other possible reasons for caution. If high oil prices or a weaker rand fuel inflation, and Reserve Bank governor Tito Mboweni moves from warning on higher interest rates to implementing them, the consumer boom could fizzle out more quickly than expected.
Manuel stressed the importance of aligning fiscal and monetary policy, but he may be tempted, if Mboweni starts turning the screws, to loosen them elsewhere.
Other big issues remain unresolved. The Treasury remains allergic to tax incentives for strategic industries, while the Department of Trade and Industry is gung-ho about introducing them. In the background, the defeat of major economic reform initiatives at the ANC’s national general council sent a pretty robust warning to the Cabinet.
Mini-budget highlights
— Lloyd Gedye