Economists, the ruling party and the official opposition have reacted to the Medium-Term Budget Policy Statement tabled in Parliament on Wednesday by Finance Minister Trevor Manuel.
”There was nothing really there that was too unexpected,” said George Glynos, market analyst at ETM. ”Perhaps the most unexpected part of it was the mention of a budget surplus in the fiscal year, which is pretty significant for the bond market. It means the borrowing requirement is likely to come down quite significantly.
”Issuance in the middle to longer end of the curve is going to come under significant pressure. Government quite honestly don’t need to borrow quite as much as they did and that explains why the middle to longer end of the bond market has strengthened as much as it has and probably explains the strength in the rand.
”The mere fact that they are expecting a surplus implies that tax breaks are not going to be substantial. The Department of Finance does not want to counter what the Reserve Bank is doing in correcting the structural imbalances in the economy.
The current-account deficit is unlikely to widen further as a percentage of gross domestic product (GDP), Glynos added, although it is going to remain relatively wide in years ahead as the government steps up infrastructural spending and spending on the 2010 World Cup.
Dawie Roodt, chief economist at Efficient Group, commented: ”No big surprises. On the expenditure side the minister’s estimate on interest expenditure is higher than ours, and I think he is wrong.
”On the revenue estimate he is taking a bit of a chance and that may not materialise, especially on companies. Looking at his estimates for revenue next year, don’t expect major tax relief next year, which is very unfortunate — I am very disappointed.”
Said Colen Garrow, economist at Brait: ”The financial stability ratios are strong, so everything referenced against GDP is good. The only caution is the current account of the balance of payments. That’s quite large at 5,7% and 5,3% as a percentage of GDP this year and next — it indicates that pressure may still be exerted with deficits as large as these.
”This is a mini-budget, which gives clues out the national budget, but no clues were given with regard to exchange controls.
”There were also no ideas about any easing in taxes, which makes sense because this [lack of tax cuts] would be helping the Reserve Bank to slow down the consumption side of the economy.
”All in all the budget is steering towards a more balanced position. Maybe one should be asking about whether that is appropriate for a developing economy. Perhaps they are thinking of the prospect of getting a better credit rating. Then can attract more FDI [foreign direct investment] and promote GDP growth.”
‘Lack of imaginative planning’
Manuel’s mini-Budget shows a distinct lack of the imaginative planning as urged by President Thabo Mbeki’s panel of international economic advisers, with no new policy thrusts announced to ensure the country achieves economic growth of at least 6% by 2010 and halve unemployment by 2014, said the official opposition Democratic Alliance (DA).
DA finance spokesperson Ian Davidson said: ”South Africa’s fiscal system is potentially one of our country’s most powerful tools to encourage greater investment on the production side of the economy, yet Minister Manuel has chosen to ignore this fact completely.”
South Africa needs a tax regime that would reward businesses with tax offsets for every new job created, and provide for a lower tax burden on corporate companies; incentives to prioritise export-oriented sectors; and incentives to allow conversion of our industrial processing zones to export-processing zones.
”Instead the general tax burden is anticipated to increase to 28,2% of GDP in 2007/08 with further burdens in the offing in the form of taxes on windfall profits in the liquid-fuels industry and a tax on mining royalties.”
Manuel proposed utilising the projected R29,6-billion revenue overrun for 2006/07 primarily to further strengthen spending on public services and infrastructure roll-out over the medium-term expenditure framework period.
”While the need for increased expenditure in these areas are acknowledged, particularly in the light of our World Cup commitments, the increased investment are of a non-tradable nature, which could increase South Africa’s current-account deficit even further, placing greater upward pressure on inflation and jeopardising further growth.
”South Africa desperately needs its growth to change from being consumption-led to being export-led. Exports here have lagged behind because the combination of fiscal barriers and the mix of other investment-affecting factors do simply not encourage investments in export-oriented manufacturing concerns,” Davidson said.
”The overall level of investment has also not come close to matching that of high-growth economies. In the first quarter of 2006 it came to barely 18,2% of GDP, with very little of it in job-creating manufacturing concerns. Overall capital inflows have also started to taper, declining substantially from an average of R58,5-billion for the first five months of 2006 to R15,6-billion for the five months from June till October.
”We believe the minister has missed a golden opportunity to balance government’s infrastructure with a stimulation package for the supply side of the economy which also encourages domestic savings,” Davidson concluded.
Increased expenditure
The African National Congress (ANC) welcomed the substantial increase in government expenditure over the next three years, as announced in the mini-Budget. The announcement of additional expenditure of R80-billion over the next three years reflects the ANC’s commitment to accelerate economic growth, social development and employment creation siginificantly, the party said in a statement.
”It is an indication also of the sound management by the ANC-led government of the South African economy and its responsible and sustainable approach to public finances,” it said. ”The medium-term expenditure framework is a concrete expression of the mandate received from the people of South Africa to tackle poverty and unemployment, and make government work better for the benefit of all.
In this respect, the ANC welcomed the stepped-up investment in infrastructure and services that have a ”most direct impact on the quality of life of our people and viability of communities — housing, electricity, water, sanitation and community facilities. This investment is complemented by additional resources to improve the quality of education, health and welfare services.”
The significant challenge of increasing the creation of job opportunities is being met through increased investment in skills development and research, and economic infrastructure such as roads, rail and energy provision, the party said.
”Spending to strengthen the criminal justice system is not only essential to make our communities safe, but also to remove impediments to even faster economic development.
”The ANC recognises that improved levels of spending are necessary, but not sufficient, to meet the needs of our people. They need to be accompanied by more effective public administration, more efficient delivery of services, eradication of waste and misuse of resources, and the more active involvement of all South Africans in the process of governance, starting at a ward level.
”The ANC will therefore continue to mobilise communities across the country to participate in local decision-making, to hold their public representatives accountable, and to be active agents of social and economic development.” — I-Net Bridge, Sapa