Government’s medium term budget policy statement or mid-term budget will not set the local economic boat rocking.
It remained focused on moderate fiscal policy, including plans to reduce the expected budget deficit, further foreign exchange reforms to ease pressure on the rand and witnessed a welcome additional R31-billion in tax revenue thanks to an improvement in the economy.
The budget made little concessions to left-leaning alliance partners and, aside from incorporating priorities set out in the country’s “New Growth Path”, provided little detail on the implementation mechanisms for this new economic policy.
The budget deficit has been revised down and will decrease from 5% in 2010-11 to 3,2% by 2013-14, in line with global moves to begin reducing state spending and debt levels.
The unexpected extra R31-billion in tax revenue will be channelled towards accumulating foreign reserves in a bid to help weaken the rand and protect local exports and manufacturing.
Moderate measures
With accumulating reserves — which reached $44-billion in September — government introduced a raft of moderate measures aimed at curbing the effects of the rampant rand.
These include sterilising investment inflows through foreign exchange swaps, as well as further foreign exchange reforms aimed at private companies, individuals and private and public pension funds.
Individuals, for instance, will now be permitted to expatriate R4-million a year subject to regulatory and tax compliance. Until now the amount was limited to R4-million during an individual’s lifetime.
Treasury will do away with the blocking of assets of South African emigrants. Previously, emigrants were allowed to remit only R8-million in assets, after which a 10% levy was charged before the rest could be released.
Government is continuing reform of the prudential framework for private and public pension funds, which will allow institutions to invest more offshore. Exchange control on domestic companies will be reformed to allow international expansion from South Africa.
What SA can do
Economists argue, however, that these measures are about as much as South Africa can do to have an impact on the rand.
Stanlib economist Kevin Lings argued that they may have a marginal effect at best. But he said the measures represented government doing what little it could, given the size of the global foreign currency market, which was too large for either government or the Reserve Bank to take on.
Finance Minister Pravin Gordhan’s relatively moderate budget did not reflect continued hopes from ANC alliance partners that, with government’s New Growth Path (NGP) policy announcement, more radical changes would be made to fiscal and economic policy.
The NGP loosely outlined government’s new economic policy, but little detail was provided on concrete steps to implement the plan, aimed chiefly at creating jobs and reducing poverty.
In spite of statements by Gordhan that the NGP was not a series of “cosmetic changes”, but that it represented fundamental reform of the economy, the mid-term budget provided little clarity on how implementation of the policy would work.
Key sectors
He echoed Economic Development Minister Ebrahim Patel, who presented the NGP, saying more detail would be provided after proposals had been discussed between business, labour and government.
A focus on six key sectors, taken from the NGP, namely infrastructure, agriculture and agro-processing, mining and minerals beneficiation, green industries, manufacturing and tourism, was incorporated into the priorities of the mid-term budget.
Interventions to reduce youth unemployment were back on the cards, including the proposal of a hiring subsidy to help first-time job seekers gain experience in the formal labour market.
This did not, however, replace the notion of a youth wage subsidy scheme, Gordhan told journalists in a press briefing on the budget.
The issue of the youth wage subsidy has been in limbo since it was proposed in February, in spite of deep suspicion of the proposal from Cosatu and the South African Communist Party.
Cost-effective job creation
“Projects that demonstrate potential for significant, cost-effective job creation will receive support to be taken to scale and implemented nationally,” said a treasury spokesperson. Government will set aside R6-billion over the next three years to support youth jobs funding.
In the light of the high wage settlements reached in the public sector this year and government’s warning that they remained unsustainable, questions about potential labour market reform remained on the table.
The budget document noted that although “workers’ rights” should remain “adequately protected” the wage-setting process should not “undermine employment and new job creation”.
Gordhan acknowledged that the subject of labour reform was a difficult one for South Africa but that discussions on the NGP would have to address the question.
He pointed to challenges in clothing factories in Newcastle, where the enforcement of minimum wages set in legislation and bargaining council agreements posed a threat to about 30 000 jobs.
Wage increase accommodation
Adjustments to the tune of R6-billion had to be made to accommodate the wage increases. An additional R2,3-billion had to be included to cover higher remuneration costs in national departments, and about R3,8-billion had to be included to cater for higher salaries and housing allowances at provincial level.
“Expenditure on compensation lays claim to 40% of tax revenue. Should wage growth continue to accelerate in excess of revenue growth, the sustainability of government employment investment and other goods and services will be undermined,” the treasury warned.
Gordhan emphasised the need for better “value-for-money government procurement of goods and services”.
He noted that about R25-billion in tender and procurement fraud was being investigated.
Five initiatives were in place, he said, to improve government supply chain management. They include improving capacity for early fraud detection as well as increasing the transparency of tender processes, including the publicising of decisions. Stiff penalties for corrupt services providers — up to 200% of contract value — have also been mooted.
Critics have argued that an efficient public service could work to decrease the steady rise of administered prices and their contribution to inflation.
Andrew Venter, the spokesperson for trade union Uasa, said that although almost all the prices in the basket of goods that make up the consumer price index had declined, administered prices — those set by government — continued to rise.