In the Medium Term Expenditure Framework delivered in October last year, Trevor Manuel announced that projections for the budget deficit over the next three years would be substantially lowered from about 3% to about 2%.
In Wednesday’s Budget he reduced this even further to 1,5% for next year, falling to 1,2% by fiscal year 2008/09.
This is a significant change in policy towards more conservative fiscal management, one that does not seem to fit into the government’s Accelerated Shared Growth Initiative for South Africa.
The conservatism needs to be explained by the Treasury and should be debated publicly. The significant revenue overrun of R41-billion for this fiscal year and a budget deficit of merely 0,5% is not supportive of an accelerated growth environment. Furthermore, we have seen the difference between Budget projections and the actual Budget grow despite the Treasury becoming more experienced and sophisticated. The inaccuracy of the budgeting process is not helpful for projections of future growth estimates.
Given the government’s consistent underspending of Treasury projections, it is quite possible that the actual budget deficits will be less than 1%, which is unacceptably low for a developing economy.
Income taxes were reduced further, while the marginal tax threshold was increased to R400 000.
Given that South Africa’s tax rates were not out of line with world standards, the question is whether these tax cuts were necessary and sheds doubt on the Treasury’s commitment to contributing to an expansionary government policy.
Other tax cuts included the reduction of retirement funds tax from 18% to 9% and the scrapping of transfer duties on houses less than R500 000.
These tax cuts, while good news for the low and middle-income earners, do not benefit the poorest of the poor who are unemployed and who are not in the housing market, whatever the price.
Pensioners and child-grant beneficiaries received about a 5% increase, representing a R4-billion increased allocation to the poorest households. This does not compare favourably to the R13,5-billion in tax cuts granted to the low, middle and upper-income earners. Thus, while the first economy was favoured, we failed the second economy.
There were further allocations for infrastructure development but capacity building seems to be the only proposed solution to the failure of local government to deliver this infrastructure on the ground. If we expect provinces and municipalities to continue to underspend for the next three fiscal years, they should simply be bypassed and contracts, especially in infrastructure development, should be tendered directly from national government to get the job done — but perhaps this would be stepping on too many political toes.
Once again, an area that did not receive adequate attention in the Budget allocations (probably because it is not adequately dealt with in government policy as a whole) is in the area of rural development.
The successful emerging economies of Asia made rural development policy a focus so that a strong rural economy could feed into and support growth in the urban areas.
The reason we need a housing budget of more than R30-billion over the Medium Term Expenditure Framework period is because we have to fight the fire of rural-urban migration.
People are moving from areas where they have homes, where crime rates are low and communities are strong to townships in the cities where they are at least guaranteed access to hospitals and schools.
If life in the rural areas wasn’t so damn hard, it would stem the tide of migration to the cities. In the same way that the government has involved experts to develop a strong industrial policy, so too should it involve development experts to focus on the rural areas where 35% to 40% of South Africans still live.
A further disappointment was the increased amounts allocated to the Pebble Bed Modular Reactor, which keeps getting revised up. In the 2004 Budget, R500-million was allocated, while R600-million was actually spent. In this fiscal year, R550-million was allocated and R580-million was spent, with a further R580-million budgeted for next year.
While it is fully acknowledged that there is a need to find alternatives to fossil fuels, there has not been enough rigorous discussion about whether this nuclear technology is the best solution. Why did Germany sell the technology after a radiation leak in 1986? If this technology is indeed a viable option, why does Eskom not borrow the necessary cash (which it can easily do in the capital markets) and reap the lucrative profits. Instead, it seems that Eskom is palming this off on to the taxpayer.
It is not clear whether this is an optimal energy solution given the projected total cost of about R15-billion and international political sensitivity around nuclear energy. More active debate and transparency from government on this issue is needed. There is no guarantee that this technology will be suitable or even a viable commercial option for resale. If so, we are pouring a huge amount of money down a black hole.
Because the Treasury has done such an excellent job in increasing revenue collection, reducing debt and stabilising fiscal policy interventions, we have become complacent and are neglecting the debate of the underlying philosophy of our macro-management. Fiscal policy is now significantly more conservative than it was in the past and will not be as supportive of an accelerated growth environment as it could be.
Réjane Woodroffe is an economist and head of international portfolio management at Metropolitan Asset Managers