Finance Minister Trevor Manuel’s budget on Wednesday preached his age-old message of prudent fiscal policy, efficiency and sustainability, even if he was touting it as a bold response to the current global economic meltdown.
A large part of his budget speech was used to defend his past macroeconomic policies and how they have been key to partially insulating South Africa from the global economic meltdown.
There were no major surprises or shocks to the system. Manuel seemed intent on only dealing with the economic crisis at hand.
Increased public sector spending will see the budget deficit balloon from 1% of GDP (R23,4-billion) to a projected 3,8% (R94-billion) in 2009/10 and it is forecast to moderate to 1,9% (R57,4-billion) by 2011/12.
This is quite a turnaround from the budget surplus of 1,7% (R35,4-billion) in 2007/08, but Manuel repeated the message that this was a necessary and sustainable solution to the current economic crisis.
Domestic GDP growth is projected to slow to 1,2% in 2009/10, following an estimated growth rate of 3,1% in 2008.
”The period of slower growth ahead is likely to be characterised by rising unemployment, declining business profitability and the closure of some companies,” said the Budget Review.
The budget forecast a 6% growth in revenue, with tax revenue expected to grow by 5%.
With inflation forecast for 2009/10 at 5,8%, this seems like a very conservative forecast.
”With the economy slowing, government is maintaining the countercyclical policy stance that has been in place for a number of years,” said the Budget Review. ”Sustained growth in expenditure and lower revenue collections result in a widening of the deficit next year.”
”While slowing economic activity will result in lower tax revenue, a low debt-to-GDP ratio combined with reduced debt service costs means the 2009 budget is able to add R161-billion to main budget non-interest expenditure without undermining sustainability or building an excessive debt burden for future generations,” stated the Budget Review.
Manuel said that as the economy recovers, government savings will improve and this deficit will decline over the medium term and this expenditure is all about positioning South Africa to take advantage of better conditions when the economic cycle turns.
Public sector infrastructure spend will total R787-billion over the medium term.
”Over the medium term, state-owned enterprises will spend more than R120-billion a year on infrastructure, laying the foundations for faster economic growth in the future,” stated the Budget Review.
Over the past 13 years the net loan debt of national government has declined from 48,1% of GDP in 1996/97 to 22,6% at the end of 2008/09. It is expected that this will rise to 27,4% of GDP by 2011/12.
This is still well below globally accepted levels. According to Dawie Roodt, chief economist at the Efficient Group, internationally prudent state debt levels are around 60% of GDP.
But while spending on infrastructure increased to R787-billion, and spending on social security is projected to reach R118,1-billion in 2009/2010, South Africa can expect to have much less fun as spending on recreation and culture has decreased by 18,3%.
The budget outlines the opportunity for South Africa to emerge from the global economic crisis on a sounder footing, through combining fiscal measures and macro-economic reforms.
These include higher infrastructure spend, expanding employment in public works, regulatory reform, strengthening agriculture, raising export performance and improving public sector performance.
In line with broader public spending Manuel highlighted additional support for development finance institutions, with proposals to increase the balance sheets of the Development Bank of South Africa and the Land Bank.
Nevertheless, Manuel stressed that while spending may increase, it was the effective distribution of cash that remains paramount, calling on government to become more efficient, effective and economical.
”It’s what the money buys that matters and so fixations with the size of deficits or surpluses are illusory detours,” he said.
”In the period ahead it will be necessary to take stronger action in pursuit of efficiency and better targeted expenditure,” said Manuel. ”There is insufficient control of foreign travel, advertising and public relations activities and consultancy services.
”A greater sense of responsibility needs to permeate the ethos of government all the way through the accountability chain,” said Manuel, ramming the point home.
In a nod to the environment, existing excise duties on motor vehicles will be adjusted to take into account carbon emissions. The plastic bag levy has increased from 3c to 4c. While a proposed supplementary depreciation allowance, has been introduced as an incentive for investments by companies in energy-efficient equipment.
Parties welcome budget
There was a generally warm welcome among political parties for the budget.
Lance Greyling for the Independent Democrats reckoned, however, that 3,8% was the outer limit for a deficit to be sustainable.
The Democratic Alliance wished that the minister could have cut corporate taxes, with the party spokesperson Kobus Marais saying that the economy needs the stimulus that such a cut could bring to industry.
His deputy, Dion George said: ”We are a bit disappointed that he didn’t cut the tax on corporates. We think that he could have done that, because if you are going to spend more you have to make sure you can stimulate the economy to pay for it.”
Narend Singh of the Inkatha Freedom Party said: ”We are extremely disappointed that R1,6-billion is being spent on South African Airways. There should be conditionalities, and before that money is given we should have a high level investigation as to what’s going on in SAA.”
Pieter Mulder, the leader of the Freedom Front Plus, was generally very pleased with Manuel’s budget.
”I think Mr Manuel succeeded in sending a message of hope, in a time when there’s really global gloom all over the world,” he said. ”I was also impressed by the common sense: Teachers must teach; the land must be worked; the call for discipline in the spending of state money, that is surely hopeful.”
Steve Swart of the African Christian Democratic Party (ACDP) was also enthusiastic. ”The ACDP supports the Budget in broad terms,” he said.
According to George Glynos, an economist at ETM: ”There were no significant surprises. I liked the fact that there was a focus on service delivery and government efficiency as a priority to make meaningful progress.
”It was also good to see the focus on education, as this will be core to building for future growth.
”The surprise for me was that the deficit was a little higher than I had anticipated.
”I think it was very much a Trevor Manuel budget. It was prudent, well thought out, balanced and difficult to criticise. It provides a cushion for South Africa through a difficult growth phase.”
Dennis Dykes, an economist at Nedbank said: ”The deficit is definitely bigger than anticipated, but it’s not completely out of line.
”Revenue estimates are pretty realistic. Expenditure rises very, very strongly. There will be a big injection into the economy to support low- income earners and unemployment. This is the right thing to do for this fiscal year, but we need to watch that in future fiscal years it doesn’t become too big.
”The cut in personal taxes was the right thing. A bit disappointing that there was nothing on company taxes.”
Sanlam Investment Management economist Arthur Kamp said Manuel’s budget uses the space he has created since taking over the responsibility of fiscal policy to put in place a crisis budget that does the necessary expansionary job in the current global and economic environment.
Kamp says government debt will increase from the higher budgeted expenditure this year but will remain at a relatively low level. ”It is also projected to stabilise once the economy picks up steam again, with Treasury forecasts of future growth not out of line with the general consensus private-sector view.”