Trevor Manuel is spoilt for choice. Booming tax revenues, aggressive debt repayments and 10 years of fiscal prudence have set him up with an unprecedented range of options.
On the 10th anniversary of his first medium-term budget policy statement he reminded journalists of what he said then: ”To govern is to choose.”
”We can now choose,” he added, ”the kinds of choices we make are important.”
But the minister of finance is also hemmed in on all sides: spending increases are constrained by capacity weakness across government, personal income tax cuts are off-limits because they would fuel the consumption fire that Reserve Bank Governor Tito Mboweni is trying so hard to contain, and a bigger budget surplus would be politically untenable. Under these circumstances, it is not surprising that the treasury is approving some spending that it might once have balked at.
Budget bling?
The planned taxpayer contribution to preparations for the 2010 World Cup has tripled from just over five billion in February’s budget to R15billion in this week’s statement. R8,4billion of that goes to new and upgraded stadiums, the rest on related transport and bulk infrastructure needs.
Another major beneficiary was Minister Alec Erwin’s department of public enterprises, which received substantial spending increases for the Pebble Bed Modular Reactor, the broadband company Infraco and defence parastatal Denel.
The reactor will get R462million to add to the R580million it has already received from government this year: ”Progress on the project from basic design to requiring long-lead materials and hardware necessitates funds in excess of those committed by existing shareholders,” the adjusted estimates of national expenditure explain.
Denel, which last week announced losses of R1,3billion, gets R847million on top of the R2billion announced in February to provide working capital and ward off insolvency.
Infraco gets R627-million to buy the ”full service network” owned by Transtel and Eskom, and to compete with Telkom in the resale of long-distance connectivity and broadband internet services.
”Stop smiling Alec,” Manuel told a plainly delighted Erwin as he read out the list of allocations in Parliament.
Other big infrastructure projects, notably the Gautrain, the De Hoop Dam, the R2,5billion Vaal River augmentation scheme and Durban’s new King Shaka Airport are also moving ahead. Substantial additional resources on public transport, including an additional R1,1billion for commuter rail, are also provided for.
Add that to more money for hospitals, police and municipal infrastructure, and spending is up just more than 9% this year, even after factoring in inflation. It is set to increase at an average rate of more than 7% over the next three years.
Still hanging tough
Treasury officials acknowledge that there is a risk of over-capitalising on projects that will not deliver economic benefits commensurate with their cost. But Director General Lesetja Kganyago is adamant that the department is not condoning splurges on prestige projects to satisfy their powerful patrons, or to push the budget into a deficit position that is more politically acceptable.
”You still have the same mean guys in the treasury. You still have governÂÂment departments screaming,” he insisted. ”If people see money they think it must be spent, but we have a responsible executive. The minister’s budget committee is a group of competent, politically sound ministers.” One example is the treasury’s role in planning for 2010, which he says was to ”get the madness out of the system” introduced by municipalities who want to build showpiece stadiums.
”We view the R15billion [for the World Cup] as being catalytic in the overall infrastructure development programme,” says acting deputy director general in the budget office Taz Chaponda.
Tight-fisted big spender?
Chaponda points out that the R80billion in new spending envisaged by the statement comes on top of already steep increases in February’s budget: ”This is not a spending story, it is a revenue story.”
Indeed. The massive new spending alone is not enough to push the budgets of the next three years into deficit. Large unallocated contingency reserves, rising from R2,2billion next year to R10billion by 2009 are included in the numbers.
All this means the budget framework is extremely well protected from economic shock, but makes it vulnerable to the criticism regularly voiced by trade unions that Manuel should permit higher deficits.
In response, Manuel and Kganyago insist that they were taking care to cushion the budget against a correction in the global economy that could take the glow off South Africa’s prospects. It would be imprudent, Manuel told journalists, to commit money to long-term spending programmes if there was a risk it might not be available when falling commodity prices and declining corporate profits cut into the tax take.
Of tax and spending
There is clear evidence now that government departments can’t spend money fast enough to keep up with revenue brought in by the taxman. (See accompanying story.) Under these circumstances one policy option might be to cut taxes and return money to consumers and companies who can decide for themselves how to allocate it, but there are limited options for doing that. The most obvious option is to reduce personal income tax, however this would dilute the impact of interest rate increases designed to control borrowing and hold back inflation.
Corporate tax cuts would probably be more palatable, but only if they lead to expanded investment, rather than big dividend payouts. Taxation now accounts for 28% of GDP and shows little sign of declining, with GDP set to reach R2trillion in 2008. That means government is taking substantially more than the 25% it has previously targeted out of the economy.
It is possible that February’s budget will contain new tax measures that adjust that ratio a little, but officials are tight-lipped about the possibility at present, urging less of a focus on ratios and more on outcomes.
”These are the choices we make”, said Manuel. ”These are the choices we believe are durable.”
The big spend
- R80-billion in new spending over three years
- R15-billion on World Cup infrastructure, including R8,4billion for
stadiums
- R627-million for a new, partially state-owned telecoms company to buy its communications backbone
- R2,9-billion this year alone to get Denel out of the woods — R847million up on February’s estimate
- R1,1-billion this year for the Pebble Bed Modular Reactor, R462million up on February
- A possible 10% stake in R5-billion Square Kilometer Array telescope
- R2,3billion for industrial incentives and technology
And the basics
- R16,3-billion for housing, municipal services and community development
- R3,5-billion for justice and crime prevention
- R3,1-billion more for hospitals and social welfare
- R1,1-billion in new money for passenger rail
- R10,5-billion for economic infrastructure and parastatals