Finance Minister Trevor Manuel said at the launch of the latest Medium-Term Budget Policy Statement (MTBPS) on Tuesday that while the past four years have been good for the South African economy, it has begun to show signs of strain.
He noted that these signs of strain are reflected in rising inflation and a high current-account deficit.
Manuel emphasised that to progress towards sustainable growth above 6%, a series of micro-economic reforms is required to raise productivity, lower the costs of doing business, cut red tape, invest more in skills and increase the labour-absorptive capacity of the economy.
“We also have to increase spending on social and economic infrastructure to remove constraints to growth and share the gains of this expansion more widely,” he said.
He concluded that the budget framework makes a contribution to higher growth and poverty reduction through investment in infrastructure, human development and community services.
“To ensure that both the public finances and economic growth are sustainable for present and future generations, the framework also signals more moderate growth in government expenditure over the medium term.”
He said the government is proposing to budget for a surplus of about 0,6% of GDP for the next three years. This is to ensure that when economic conditions deteriorate, the government will have the resources to “cushion” the economy.
Manuel noted that when cyclical revenues are removed from the calculations, the structural budget balance indicates a deficit that will rise to about 1% of GDP in 2010/11.
Spending
The government is planning to spend an additional R81,4-billion over the next three years, which averages out at 6,4 % each year. The MTBPS says that although steady improvements in public services are planned, the framework recognises that the abnormally high revenue flows brought about by the upswing in the economic cycle have changed the macro-economic context, and there should now be some moderation in government expenditure.
Accordingly, the statement says: “The emphasis is on investment that supports growth and employment creation, and strengthening critical social and human development programmes.”
At the same time, two-thirds of the increase in spending will go to provincial and municipal governments.
Budget priorities include further investment in infrastructure (with emphasis on broadening access to basic household services), public transport, education, health, labour-intensive employment initiatives, and industrial policy initiatives that raise productivity and employment. The government also plans to spend more on fighting crime and improving service delivery.
The budget policy framework points out that progress in improving public services has failed to keep pace with increased financial resources, and the 2008 budget will make a priority of improving public services in certain areas.
For example, in education, more is to be spent on early childhood learning, which will increase success rates in later years, and more will go to the collective buying of textbooks, to reduce costs and allow for greater access to learning materials.
Improved traffic enforcement will remove unroadworthy vehicles from the roads, reduce accident rates and relieve pressure on hospital and emergency services.
Better agricultural extension services and post-settlement services will improve the chances of the land-restitution programme reaching its targets.
This year’s public-service salary deal will result in an additional R15-billion bill to add to the baseline allocations of national departments and provinces. Inflation-related adjustments to social grants are expected to take up R43-billion of the funds available over the three years of the medium-term expenditure framework.
Provision must also be made for rising numbers of social-grant beneficiaries. In addition to the improved social grants, provision is being made for expanding the school nutrition programme to cover more children on more days for the full school year.
National expenditure
The adjusted estimates of national expenditure introduced by Manuel also include R744-million to support the restructuring of South African Airways (SAA).
The estimates also include proposals for an additional spend this year of R400-million for the treatment and prevention of multidrug-resistant tuberculosis, and another R654-million for unforeseen and unavoidable spending associated with fire, floods, drought and other adverse weather conditions that have been afflicting large parts of South Africa.
This is the second adjustment of the spending estimates this year. Earlier, money was brought forward to speed up Soccer World Cup stadium-building, the pebble-bed modular reactor, and to boost funds for Denel, Alexkor, the Land Bank and Sentech.
With the new estimates, the budget surplus rises to R10,8-billion, marginally higher than the R10,7-billion projected in February.
CPIX
While CPIX (consumer inflation less mortgage costs) inflation in South Africa has been revised upwards markedly for 2007 and 2008, some moderation is seen in the forecasts over the following two years, data in the MTBPS shows.
The Treasury says that CPIX is now expected at 6,2% in 2007 from the 5,1% announced in February. CPIX inflation is expected to average 5,4% in 2008, but then to recede to an average of 4,6% in 2009 and 4,5% in 2010.
While Manuel was far more optimistic this time last year about inflation possibly remaining within the target band, the expectations this year have been modified due to broader inflationary pressures.
The inflation target range for CPIX is between 3% and 6% and CPIX has broken above the upper limit for the past six months.
“Cumulative interest-rate hikes by the Reserve Bank, totalling 350 basis points since 2006, should in time lead to a moderation of domestic demand and contain inflation expectations. CPIX inflation is expected to average 6,2% in 2007 before declining within the target band over the medium term,” notes the Treasury.
Manuel indicated in a press conference prior to delivering his speech that if he was going to make changes to the inflation-targeting framework, he would have said so. The MTBPS does not make any announcements in this regard.
Labour
South Africa’s industrial and labour-market policies need to focus on labour intensity of the economy so that jobs can be created at a faster rate, Manuel said.
He said: “Greater progress channelling young people into jobs has to be a central policy objective in coming years.”
South Africa’s unemployment rate at 26% is one of the highest in the world.
GDP
While revising its GDP estimate for 2007 upwards to 4,9% of GDP from the 4,8% projected in February, the Treasury has also revised downwards its 2008 projection markedly to 4,5% from a projected 5,1% in February.
According to the MTBPS released on Tuesday, the expected moderation in growth in 2008 is largely a result of slower growth in developed markets as a result of the subprime mortgage crisis in the United States and the associated credit crunch and slower, more sustainable growth in domestic consumption as the effects of higher interest rates take hold.
“Although commodity prices have risen over the past year, record-high oil prices will act as a drag on growth. In addition, higher oil and food prices have put pressure on unit labour costs and domestic inflation,” says the Treasury.
The MTBPS shows real GDP for 2009 down to 4,8% from the 5,4% projected in February, but then up to a healthier 5,3% in 2010.
“Growth in output should accelerate form 2009 onwards as the global environment improves and the supply capacity of the economy expands. Positive spin-offs from 2010 Fifa World Cup preparations will also boost economic activity over the medium term,” concludes the Treasury.
The MTBPS notes that investment has risen from about 15% of GDP in 2002 to nearly 21% in the first half of 2007.
Tax
While total revenue is estimated to have increased to R553,1-billion for the 2007/08 financial year from R544,6-billion previously, a laggard is value-added tax (VAT) collections, expected down by R8,1-billion in 2007/08.
VAT collections for 2007/08 are forecast down to R147-billion from R155,1-billion expected in February. Only a slight increase to R162,4-billion is forecast for 2008/09, but then collections are set to rise to R179,5-billion in 2009/10 and to R195,6-billion in 2010/11.
The decline in VAT projections in the current fiscal year will be a viewed with some trepidation by the equity market as an indicator of lower business growth. A large contributor to the expected increase in collections, however, is personal and individual tax, forecast to lift by R11,7-billion to R167-billion in 2007/08.
Audited VAT was at R134,5-billion for the 2006/07 year.
A total of 298 814 applications have been received under the small-business tax amnesty launched last year, according to the MTBPS.
During the application period between August 1 2006 and June 30 2007, 353 388 applications were received, of which 298 814 were for amnesty and 54 574 were for the waiver of additional taxes, penalties and interest. The taxi industry contributed 24 174 applications.
The Treasury says initial analysis indicates more than 22% of applicants are new registrants.
Target enforcement resulted in the issue of more than 200 arrest warrants, nearly 1 000 summonses and the collection of more than R70-million through writs of execution.
New prisons
The government is planning to build five new prisons in a public/private partnership as part of its plans to step up the fight against crime. The five prisons, in Paarl, East London, Port Shepstone, Nigel and Klerksdorp, will cost between R800-million and R900-million each, and will each house about 3 000 prisoners.
According to Taz Chaponda, who oversees public-private partnerships at the Treasury, the facilities will be built as maximum-security jails, but will also be able to house medium-security prisoners as well.
Public-private jails have proved controversial after the first two were built five years ago. Their critics describe them as over-specified, in that they are too refined and too comfortable, and the contracts prevent a single extra prisoner being housed over the budgeted number.
This, however, will apparently change with the new prisons. The private-sector company will design, build and operate the prisons, but they will be financed jointly by the state, which will give the authorities greater leverage.
Capital outflows
While most emerging markets have benefited from improved macro-economic fundamentals, this does not eliminate the possibility of sudden and large capital outflows.
The Treasury said that in South Africa’s case the economy is borrowing to pay for its investment, which highlights the importance of ensuring that investment will generate improved economic growth over the long term. South Africa’s current-account deficit rose to 6,7% of GDP in the first half of 2007 from 6,2% in the first half of 2006.
Capital inflows, largely via portfolio investment from overseas, have been financing the deficit until now. “South Africa’s balance of payments position remains positive despite the growing mismatch between savings and investment reflected in the deficit on the current account,” notes the Treasury.
It also points out that South Africa’s vulnerability to external shocks has declined as government increased its foreign-exchange reserves and reduced short-term foreign liabilities. However, it concludes that “great effort” needs to go into boosting exports to increase the sustainability of the recent domestic investment boom.
Clampdown on entertainment, travel
The Treasury says it is planning to clamp down on government extravagance and waste in an effort to save R2,3-billion to spend on more front-line services.
The MTBPS says that the 2008 budget in February will put the spotlight on controlling costs. It also promises that the budget will signal a renewed focus on efficiency.
“The sequencing of government’s plans needs to be well managed,” the document says, “and spending programmes need to complement one another.”
Government departments and other entities will be expected to include explicit efficiency savings in their strategic plans next year.
The list of expected cost containment plans reads like a document drawn up by opposition politicians in Parliament: “Targeted expenditure includes unnecessary travel and subsistence costs, entertainment, poorly managed consultancy services, outdated administrative systems, misplaced marketing and communication initiatives, and weaknesses in supply-chain management.”
Cash-rich Setas
Manuel said that the country needs to explore options for integrating education and training finance. He pointed out that financial management has been poor in several of the sectoral education and training authorities (Setas)
“At the end of last year,” he said, “our Setas held over R3,7-billion in cash reserves, effectively levy income that employers had not yet utilised to reimburse training expenses or skills-development projects that had not yet been implemented.”
He told MPs that other parts of higher and further education that are ready to expand enrolment and step up their contribution to human investment do not have the financial resources to do so. “This can’t be right,” he said.
Mineral royalty Bill
The Treasury also says that a third and final draft of the Mineral and Petroleum Royalty Bill will be released by mid-November 2007.
“There will be some adjustments,” said Franz Tomasek, head of law administration at the Treasury. He was not able to elaborate on what these adjustments would entail.
The final draft will be considered by Parliament’s portfolio committee on finance, and the new royalty regime is scheduled to start on May 1 2009 to coincide with the conversion to the new mineral-rights regime brought about by the Mineral and Petroleum Resources Development Act. — I-Net Bridge