Minister of Finance Trevor Manuel has added R6,6-billion to planned spending on the administrative capacity of the government over the next three years, as the state tries to get better at converting the current economic momentum into sustained development.
Response to the Budget has focused largely on its happy mix of tax cuts, spending increases and tight fiscal ratios, which had something to please everyone from upper-income wage earners to trade unionists and dour economists.
Even business, which has complained that it lost out on a bigger tax cut to individuals who are already flush with cash gets a large effective saving through the elimination of the Regional Services Council Levy.
But Treasury officials privately admit that in the background to an epic R41-billion revenue overrun during 2005/06, and a budget deficit worth just R7,9-billion — or 0,5% of the gross domestic product (GDP) — is the fact that the government simply can’t spend all the cash that Pravin Gordhan’s revenue service is bringing in from fatter, better behaved taxpayers.
In an effort to change that, spending plans are moving ahead of President Thabo Mbeki’s long-running review of the organisation and capacity of the state.
On top of big increases announced in the last Budget, the Presidency gets an additional R82-million over the next three years to beef up its staff and systems.
The Cabinet office, which oversees the government’s programme of action, has already seen its budget triple in the past year.
Geraldine Fraser Moleketi, also a big beneficiary last year, gets R210-million more over three years to strengthen internal capacity in the Department of Public Service and Administration, which oversees the machinery of the state.
Another crucial coordinating mechanism is Project Consolidate, which helps the most disastrously mismanaged municipalities to get back on their feet. It gets R57-million in new money for administration by the Department of Provincial and Local Government.
Public Enterprises, which is at the sharp end of plans for massive investment in transport and energy infrastructure, gets R75-million in new money for staff and systems to help it oversee the much bigger amounts its portfolio of companies must absorb.
The revenue service itself gets R950-million to beef up its operations, while public works gets about R3-billion to resolve maintenance backlogs and transfer buildings to the departments that occupy them.
R1,8-billion goes to improving the functioning of the courts, where efficiency is vital both for justice in the abstract and for the operation of the economy.
Annual growth of nearly 10% in education spending over the next three years is designed to hit what Manuel clearly believes is the worst bottleneck to growth: skills. Briefing journalists ahead of his speech, he stressed not only new funding for higher education, but argued for a return to the apprenticeship system — previously seen as politically unpalatable.
”When one looks at the shortage of artisanal skills, you aren’t going to address that with 12-month learnerships,” he said.
Manuel quoted the Nigerian writer Ben Okri throughout his speech: ”Let no one speak [to me] of frontiers exhausted, all challenges met, all problems solved,” he said, before handing out a booklet of Sudoku puzzles to MPs.
Having solved the problems it inherited from the last national party government — 9% deficits, massive debt service costs and rampant inflation — he suggested, there is now a trickier challenge.
South Africa has at last broken free of it sluggish 2% to 3% growth band to hit 5%. But, as the Budget Review points out, that growth is unbalanced, too heavily reliant on ”domestic demand” (shorthand for the current consumer spending spree) and not enough on ”supply side” expansion, or growth in industrial capacity and outputs. For job creation to speed up, and benefits to move faster to more marginalised sectors of the economy, that needs to change.
One solution to the problem is supposed to be the Accelerated Shared Growth Initiative for South Africa (Asgisa). But despite the big political push coming from Deputy President Phumzile Mlambo-Ngcuka, it is far from clear that everyone in the government sees this programme as the answer to 6%. It got very little attention in the Budget, and many in the Treasury are downright hostile to some of its provisions.
”We have reached 5% [growth] without any massive intervention,” Manuel told journalists ahead of his speech, by way of explaining that the local economy had hit its ”sweet spot”.
One aspect of Asgisa — plans to reduce the cost of crucial business inputs such as transport, telecoms and energy — gets lots of support in this, and previous budgets, with backing for major investment plans by the parastatals. Those plans, of course, were formulated well before the birth of Asgisa.
Its other major element, the industrial strategy currently being developed by the Department of Trade and Industry, does not.
Asked about the possibility of tax incentives for ”strategic” industries such as tourism, call centres and minerals beneficiation, Manuel simply said more work needed to be done. His officials, however, are wedded to the principle of ”horizontal tax equity”, and believe incentives are far too easily abused.
They would prefer to see tax reductions across the board to special deals created in an attempt to pick winners. And they are scathing about the performance of the Department of Trade and Industry’s numerous financing and industrial development schemes, saying there is very little concrete evidence that they have achieved results. Alone among the ”lead” departments, the Department of Trade and Industry gets only minor increases in new funding for its own programmes, although about R2,5-billion will go to industrial development zones such as Coega.
Without very careful management, of course, there is a risk that infrastructure spending could also be misdirected — particularly as pressure to invest builds at government departments and state-owned companies.
”You have to be sure that investments in economic infrastructure actually improve productivity,” says Johan Fedderke, a professor of economics at the University of Cape Town, who has done extensive work in this area. The government has not done enough work, he suggests, to ensure that its big projects are not simply ”pork barrel” political favours.
The Gautrain rapid-rail link, which will get R14-billion over the next three years and a total of R20-billion, is a case in point, which made many in the Treasury deeply uneasy.
Ill-conceived mega-projects not only divert funds that could be better spent, they tie up scarce artisanal and engineering skills, and can push up the cost of other inputs, such as cement, which are needed in more important projects, like the Gauteng to Durban freight logistics corridor.
Despite the tax cuts, the government is taking an expanded slice of the economic cake. The ratio of tax to GDP, which the Treasury has previously tried to keep below 25%, has now drifted close to 27%.
But concerns about the quality of spending are reflected in how that cash is deployed. Despite miniscule deficits — which won’t rise above 1,5% for three years — a substantial proportion of it will go to pay down loans.
The cost of servicing debt has now declined from 3,3% of GDP to 2,7%. Interest payments account for just 11% of government spending.
In a virtuous circle, that makes more money available for other things, and reduces the cost of future borrowing.
That being the case, Manuel’s embarrasment of riches won’t be disappearing in a hurry.