Finance Minister Trevor Manuel took a leaf out of Springbok coach Jake White’s book on Tuesday. Competitiveness will be boosted with a long-term, three-year plan to raise the economy from a slow but steady jog into a marathon-winning pace. Excess fat will be shed, with government departments told to slash their entertainment allowances in favour of a renewed focus on the goal of service delivery.
South Africa could become a winning nation, according to Manuel’s vision, if we work hard, create jobs and hawk enough products overseas. But every coach comes with a price tag. In this case government plans to collect revenue of between 27,4% and 27,2% of GDP over the next three years — well above the 25% level recommended by the Katz Commission, which looked at tax policy.
According to the treasury’s forecasts, GDP is expected to grow from an estimated R1,965-trillion this year to R2,659-trillion in 2010. By next year South Africa will be a R2-trillion economy.
The medium-term budget policy statement sees revenue growing from an estimated R553,1-billion this year to R740,5-billion in 2010. This means that the extra 2,2% taxpayers will give the state in 2010 alone amounts to some R58-billion.
“The fact that we are close to 30% does give me some concern that the tax revenue extracted from the economy is too high for a developing country like South Africa,” said Ernie Lai King, director of tax at law firm Deneys Reitz.
High taxes affect the level of savings and the cost of doing business in the country, said Lai King. Personal income tax, VAT and corporate tax account for nearly 80% of the total budget revenue. Ultimately, both VAT and company tax are passed on to the individual through prices, so individuals carry the bulk of the tax burden. The increasing complexity of our tax system, including the new Mineral and Petroleum Royalty Bill, increases the cost of doing business in South Africa, said Lai King.
But Manuel was more concerned about service delivery and government savings on Tuesday, emphasising the importance of putting money aside in good times to cushion the economy when times are bad. He argued that revenue overruns due to cyclical factors, such as high commodity prices and the consumption boom, should be treated differently. Cyclical revenue should be spent on “things that raise our ability to grow faster in the long term”, such as infrastructure, education and institutional capacity. It could also be used to pay off debt or for savings.
So the R8,5-billion overrun in revenue this year is unlikely to be handed back to taxpayers next year, but instead invested in fixed infrastructure, said Stanlib economist Kevin Lings. Fixed investment reached 20,7% of GDP this year, making the Asgisa target of 25% by 2014 “imminently achievable”, according to the medium-term budget policy.
Liberalising trade policy and boosting exports would be critical in funding the country’s current account deficit, which is expected to continue for the next three years, and in reaching economic growth targets. High protection rates have sheltered businesses at the cost of the consumer, Manuel said.
“To boost economic growth beyond 6% in coming years, it is crucial for South African companies to take advantage of market access and systematically expand global market share in manufacturing, agriculture, mining and services,” Manuel said. In addition, a less restricted operating environment is needed in the telecommunications sector. This would have strong positive economic effects and raise economic growth above the 5,4% the sector achieved in the first half of this year.
The textile and motor industry sectors are two that are likely to feel the heat. According to treasury, the tariff protection these industries enjoy come at a heavy cost to the consumer. In the case of textiles, at least, protection from imports has not resulted in substantial domestic investment. (See story on page 4).
As usual the medium-term budget statement also included expenditure adjusted from that announced in February’s budget. Among the changes Manuel announced is the news that an extra R1,9-billion will be spent on public servants’ salaries, as the wage agreement this year was higher than budgeted. This will be funded in part by asking government departments to save R2,3-billion in the next three years by slashing the amounts spent on “unnecessary” travel, hotel accommodation, catering, entertainment, “poorly managed consultancy services” and “misplaced” marketing initiatives.
Athletes are nothing without training, and South Africa is not unique in facing a skills shortage. Financial management has been poor in several of the sector education and training authorities, with the Setas holding more than R3,7-billion in cash reserves by the end of last year, said Manuel. But other educational institutions lacked the financial resources they needed. “This can’t be right, and so surely we need to explore options for improving the integration of our education and training financing arrangements,” he said.
Getting more people on to the playing field is another goal. “Both industrial and labour market policies must focus on raising the labour intensity of the economy so we can create jobs at an even faster pace. Greater progress in channelling young people into jobs has to be a central policy objective in coming years.”