Critical public discussion on South Africa’s 2008 budget should focus primarily on whether the budget advances the government’s core mandate of addressing poverty and inequality in the country. The budget must be guided by the state’s obligation to realise the socio-economic rights enshrined in the Constitution, including rights to health, education and housing.
There has been a prolonged period of inadequate investment in economic infrastructure, such as in electricity-generation capacity and road and rail systems. Because of this, the budget has to play catch-up in these areas and there will be constraints on resource allocations to such social services. Nonetheless, for the sake of increased social equity, both the quantity and quality of social programmes must be improved.
Against this backdrop, the decision in this year’s budget to continue to run a budget surplus over the next three years appears to fly in the face of the government’s constitutional obligation to use “its available resources” to realise these rights progressively. The government subordinates the logic of socio-economic rights to the logic of macroeconomics when it argues that a budget surplus is necessary to boost savings at a time when South Africa’s savings are insufficient to fund investment plans.
But if there is such a need to shore up domestic savings, why has the decision been taken to lift exchange controls on institutional investors? South African savings will now be freer than ever to move offshore.
Anyway, the budget surplus does not contribute significantly to national savings, adding only about 5% to overall savings, with most domestic savings generated by households and the corporate sector. A much more significant factor in closing the savings-investment gap is the inflow of offshore savings in the form of capital inflows, which funded more than 37% of investment in South Africa last year.
It is perhaps indirectly, then, that the budget surplus contributes to the total pot of savings available, as it sends signals of fiscal probity that will attract foreign capital inflows.
The effect of lifting exchange controls is to integrate South Africa further into the global financial system. This integration will ease the inflow of foreign savings and will act to discipline and constrain government. So perhaps a more fundamental reason for the government’s choice to run a budget surplus is to create some fat in the system, which might act as a shock absorber during any turbulence associated with South Africa’s further integration into the global financial system.
While instruments such as exchange rate and monetary policy will be constrained by such an integration process, it is important for purposes of advancing South Africa’s development imperatives that fiscal policy should not be overly restricted. Fiscal policy is the lifeblood of South Africa’s project of broad-based equitable social transformation. The developmental state requires a long-term commitment to use fiscal resources to correct structural weaknesses in the economy.
In the next three years, the cost of the budget surplus, in the form of taxes collected but never spent, is projected at more than R55-billion. These resources should be used to develop improved government services such as healthcare, education and policing. Thousands of vacant posts should be filled and necessary skills retained by, or attracted to, the public service.
Furthermore, this budget surplus is considered at a time when the government plans to slow the growth of expenditure on all its major functions. The annual growth in spending on social services is set to decline from 15,8% in the past three years to 11,5% in the next three years. Similarly, the annual growth in spending on protection services is set to decline from 11% to 9,6%.
There is an important debate about whether the country’s economic growth and tax revenues are being driven by short-run forces, such as the continuing commodity boom, or by longer-run forces. In this regard, the government introduced the concept of the structural budget balance in an attempt to strip away the short-run cyclical effects that drive the actual budget balance.
If the economy’s recent growth performance is a short-run boom then there might be justification to plan for a short-run budget surplus. If economic growth is expected to be sustained for some time, budgeting for a medium to long-run surplus while there is poor and unequal service delivery amounts to an unnecessary limitation on fiscal policy.
It appears that the details of how the structural deficit will be calculated have not been fully canvassed, or settled, by the government. A number of indicators, however, suggest that South Africa’s higher fiscal potential is not a short-run cyclical phenomenon, but that it might be sustainable in the longer term.
Fundamental forces underlying sustainable South African economic growth include increased participation in the economy, improved investor confidence and longer-term investor planning. There are reasons to understand the commodity cycle as a long-run cycle driven by demand from China and other Asian mineral importers.
This optimistic view could be undermined, though, if South Africa’s electricity-generation problems undermine growth and negatively affect tax revenues.
When we evaluate the 2008 budget, there is a need to move beyond the simplistic response that South Africa’s fiscal policy must be regarded as developmental if social expenditure is growing in real terms per year in medium-term budget projections. A much more detailed and nuanced assessment must be made of how best to use South Africa’s available public resources to maximise the development of the country’s human and economic potential in the years to come.
Kenneth Creamer lectures in economics at the School of Economic and Business Sciences at the University of the Witwatersrand