Strong growth has been the rocket fuel in a budget that has expanded social service spending to maintain a welfare state.
The treasury has let tax revenue accumulate, with minimal tax cuts, to grow non-interest expenditure in real terms by 7,7% over the next three years.
Government spending has increased by 9,2% in the past three years.
There are strong pro-poor and pro-employment initiatives in the 2007 budget. These include tripling the housing budget and expanding the welfare grant system.
It is notable that there are now as many people in the jobs market as there are on welfare: social grants will fund about 12-million beneficiaries in the coming year. Finance Minister Trevor Manuel is chuffed with himself for an expansionary fiscal stance while running a fiscal surplus. But critics are less sure that a surplus is a wise idea in a country with one of the highest inequality levels in the developing world. They also argue that more could be done to support job creation through the fiscus.
The education and health workers’ union, Nehawu, says that the budget surplus is as a result of underspending and under staffing. Last year’s R5-billion surplus roughly equals under-spending in that year.
The People’s Budget Campaign, a civil society coalition, welcomes the increased spending but says that treasury ”squandered” fiscal space by not targeting high poverty and unemployment levels. The coalition is disappointed that despite having the funds Manuel and President Thabo Mbeki remain dead set against a basic income grant.
A breakdown of consolidated expenditure shows a bias towards social services, which include health, education, social security and housing.
For 2007/08, social services comprise 56% of consolidated expenditure. In contrast, protection services (police and justice) comprise 16% of total spending and economic services (transport and communication) 20%.
The housing budget is projected to increase by from R4,6-billion in 2003/04 to R12,5-billion by 2009/10.
The government plans to increase infrastructure spending from a less than 6% average in past years to about 6,3% over the medium term. Ten percent of infrastructure spending will go to housing, 9% to water, 5% to hospitals and 4% to schools.
The government will increase fixed capital expenditure from an average of 5,9% in 2001/05 to 12% in the period 2005/09.
This shift is especially positive for formal sector employment, said Miriam Altman of the Human Sciences Research Council, adding that the state had under spent on infrastructure for decades.
Financial support for community-based investment and creative micro finance could help scale up job creation, she said, adding that the budget also encouraged employment through social-sector measures, such as the additional R125-million for expanded public works.
Independent public policy analyst Ebrahim-Khalil Hassen said notable increases in the housing and land- affairs budgets reflected a more concerted effort to get assets to the poor.
The state could learn from the British government, which links social security to asset building by creating savings accounts for children who qualify for child support.
But a key problem preventing the budget supporting a clear strategy for job creation and poverty reduction is the government’s lack of a comprehensive development strategy, he said.
Other analysts say job promotion is especially critical if commodity prices dip and economic growth slows down, because it would be difficult to sustain such a large welfare commitment.
In many ways, the 2007 budget typifies the government’s departure from contractionary policies in the 1990s.
Civil society applauded as a step in the right direction Manuel’s decision to commit funds to increasing the number of teachers and healthcare workers as a step in the right direction.
In the 1990s, the public service was slashed from 1,2-million to the current figure of less than one million.
Manuel promised R8,1-billion for additional teachers, teaching assistants and support staff and improved salaries over the medium term. The department will spend R700-million on bursaries for 13 000 teachers. Treasury also hopes to grow the number of health workers by 30 000 in the next five years.
The government has allowed tax revenues to increase as a percentage of GDP.
The macroeconomic strategy, Gear capped the tax-to-GDP ratio at 25%. Against a backdrop of aggressive tax collection, the government did not cut taxes when tax revenue began to exceed this ratio in recent years and Manuel expects it to level out at 27% of GDP by 2009/10.
Increased taxation benefits the poor given a progressive tax regime, say analysts.
Manuel left the regressive value-added tax unchanged, raising the minimum annual income at which people pay tax from R40 000 to R43 000.
This means that almost half the workforce will not pay personal income tax, according to the September 2005 Labour Force Survey.
The People’s Budget Campaign has said that the tax breaks do not benefit low-income earners or the unemployed.
But Manuel has been gradually raising the cut-off from R18 000 a few years back, enabling the working poor to enjoy an almost complete tax break.
Effectively, this means that all domestic workers, farmworkers and most low-level blue-collar workers do not pay income tax.
Social welfare spending is a prominent feature on the spending landscape. The social grants allocation tripled in real terms from 1997 to the present and the number of beneficiaries grew from three million to 11,8-million. The budget only doubled in that period, according to treasury data.
To extend social security, the government is proposing a mandatory earnings-related scheme that would provide unemployment insurance, disability and death benefits and retirement savings.