Given our stage of economic development, the national treasury has long been criticised for being too conservative in the face of high unemployment, poverty and inequality. The combination of higher-than-expected revenues and lower-than-budgeted spending by government departments led to ever smaller budget deficits that eventually resulted in fiscal surpluses. Because of the cyclical downturn in the local economy, revenues from corporate profits and value-added tax receipts will decline.
It is this downturn that will push the fiscal balance into deficit, not necessarily because the treasury has suddenly reviewed its conservative stance and turned expansionary. In this medium-term budget policy statement the optimistic economic growth projections of 5% for this year and 4% for 2009 were revised down to more realistic, but probably still optimistic, rates of 3,7% and 3% respectively, with the growth trajectory expected to turn upwards again to 4% in 2010.
But recently released economic data point to a more severe slowdown in consumer activity, which is about two-thirds of the overall economy. It is during such downturns that fiscal policy should become expansionary to keep economic growth buoyant and to help smooth the business cycle. Furthermore, and more importantly, fiscal spending and planning needs to address the most glaring constraints of sustainable economic growth aggressively over the long term: inadequate education and skills, physical infrastructure and a competitive and productive environment for industry and economic service development. Because such spending is not for consumption and will yield long-term investment returns through economic growth, it is not imprudent.
Although there were some additional allocations to Eskom and for 2010 infrastructure, the average annual growth from this fiscal year to 2011/12 in the economic services and infrastructure category of 5,8% will be the lowest when compared with the three other main categories of government expenditure, namely social services, administration and protection services, all of which will grow annually in the region of about 10%.
The theme of this budget announcement was “Liduduma lidlule!” (The thunder will pass!), which referred to the global financial crisis and economic slowdown and our ability to weather the storm. Because we are still largely a commodity exporter, the recent fall in commodity prices from growing fears of a global slowdown has affected export revenues significantly. But, when commodities experienced one of the biggest price booms in recent history, South Africa’s participation was paltry compared with that experienced by other commodity producers such as Canada and Australia. We were simply unable to get the commodities off the ground and transport them to export markets because of inadequate infrastructure and transport systems. The question is: when the next commodity boom happens, will we miss the boat again?
Furthermore, of the allocations that have been made, those government departments that are directly responsible for the bulk of infrastructure spend and laying the groundwork for the development of industrial and economic services, the departments of public works, housing, trade and industry and water affairs, are among those that underspend the most.
Developing infrastructure and growing productive capacity is critical to removing the constraints to long-term and sustainable economic growth. The most obvious and recent example was the electricity crisis that significantly affected all sectors of the economy. The underlying capacity constraint across economic sectors was a central motivation for the particularly tight monetary policy stance of the Reserve Bank. In the Reserve Bank’s assessment when economic growth reached more than 4% it began to grow above capacity. Growth rates above the long-run capacity of the economy are inflationary. Simply put, if there is greater demand for transporting goods than there is supply of such transport, prices will increase, fuelling inflation and prompting painful macro-economic adjustment through higher interest rates.
In this budget document the importance of government investment in infrastructure is noted: “Public investment in economic infrastructure crowds in private-sector investment, with significant expansion plans in agriculture, mining and manufacturing in anticipation of greater capacity in the key utilities. For example, construction of the De Hoop Dam unlocks new mining opportunities; new power stations generate both demand for coal supplies and greater opportunities for industrial development; and improvements in transport networks contribute to export growth and the mobility of goods and workers.” Thus it is disappointing that the growth in spending in this area is not tackled more aggressively to enable the South African economy to be in a position to participate in the next upturn in the global cycle more fruitfully than we did last time.
Réjane Woodroffe is head of international portfolio management at Metropolitan Asset Managers