What is good about the 2007 budget?
Firstly, that Minister of Finance Trevor Manuel opted for a surplus where he collects more than he spends — 0,6% of GDP, or about R11-billion. The final number will in all likelihood be a bit higher, probably 1% of GDP, or about R19-billion. In a country where poverty is rife, inequality even worse and social needs very high, this is a risky political thing to do.
Why not spend all the money you collect? The children’s allowance, for example, only goes up by 5,2% from R190 to R200. Why not add another R10 and spend more money? Easy enough to do; no spending constraints. On the other side, why not cut taxes and give the money back to the people who paid it in the first place? Why run a surplus?
The minister gives the answer himself on page 10 of his speech: “In a country like ours with a low level of savings [a surplus] is government’s contribution to a national savings effort …” (my emphasis).
Current account
The big stalking lion on South Africa’s economic scene is our current-account deficit. That can kill all the progress we are enjoying. We import much more than we export — about 5% to 6% of GDP. That deficit has to be financed and at the moment it is easily done because foreigners are pouring money into the country ‒ more than R100-billion last year, and quite a brisk amount so far this year.
But what if the foreigners stop pouring money into the country, or even just cut their funding from R100-billion to, say, R50-billion? Well, the rand will take a beating; inflation will run; interest rates will rise; equity and property prices will tumble. That will be bad for rich, poor and middle classes all alike — we went through that in 2001. The way to hedge against that risk is to increase savings.
The classic equilibrium formula in economics is: savings minus investment = exports minus imports (or s minus i = current-account balance). Thus, if you want to fix the current-account deficit, either export more or save more. The government helps savings by running a small surplus. The gap “s minus i” is reduced and that curtails the current-account deficit. Running a surplus is the right economic thing to do.
The minister did a few other things to stimulate savings:
- He abolished the tax on retirement funds (at quite a price: R3-billion on top of the R2,5-billion he sacrificed last year when he reduced the tax).
- The interest exemption went up a bit (his timidity here is probably explained by the fact that international research shows these measures do not always enhance savings, it merely shuffles them around).
- Estate-duty exemption is lifted for the second year running, now at R3,5-million from R1,5-million two years ago. These latter two items cost R0,5-billion.
- The biggest thing of all, of course, is the proposed compulsory contributory scheme for social security that will come into effect in 2010. That will be based on earnings, and the money so collected will enhance savings.
Myth
“The surplus is just because the government cannot spend the money.”
This is one of the great myths of our political economy, and you heard commentators spouting it again this week after the budget speech. Over the past three years spending has risen by 9,2% a year in real terms (that is, after inflation). That is an enormous amount of extra money that physically went into society.
Over the next three years spending will rise by 7,7% in real terms — more than 1,5 times the expected inflation rate. If you keep spending 90% of a budget that rises much faster than inflation, you are getting real extra money into society. For the record: the past two years’ total spending came to R886-billion and the combined unspent funds came to R9,5-billion.
Nearly R2-trillion will be spent over the next three years. That is more than the entire size of the South African economy this year — about R1,75-trillion. The non-spending amounts add up to a few billion a year. Can we get real about this non-spending yapping?
What was not good?
The failure to do more on the foreign-exchange control side. The R2-million allowance for individuals could have been raised considerably (to, say, R5-million); companies allowed to invest bigger amounts outside South Africa; and savings institutions allowed to invest overseas subject only to prudential requirements. When it comes to forex control, the minister is a real Scrooge!
The surprise in the budget was the abolition of secondary tax on companies (STC) and replacing it with a dividend tax at shareholder level.
Derek Keys introduced STC in the early 1990s; it was a highly efficient tax and easy to collect. But in an increasingly globalised world the tax stood out as an anachronism. The standard practice worldwide is to tax dividends in the hands of the shareholder. From the end of 2008 this will be our lot (more pain in the neck for us when we fill in our tax forms!) and at a rate of 10%.
Standing back — the long view
Growth in South Africa in the past few years has averaged just below 5% a year. Over the three years of this budget cycle (the minister always gives his budget plus the numbers for two years out), the forecast is for an average of just more than 5%. (I remember my late father saying a few years ago he wonders whether South Africa will ever see 5% growth again).
The proviso is, of course, that there is no international crash or geo-political disaster. But as long as China and India pumps and the rest (the United States, European Union, Japan) do about 2%, we should do 5%. For investors a benign picture; for citizens the reassurance that the economy creates the space for social and societal development.
Progress is a process and the most important part of the process is economics — we are firmly on it.