Summary of SACOB's submission to the Portfolio Committee of Finance's hearing on the 1999/2000 Budget
1. Let me congratulate the Minister on an excellent budget. This budget is another corner stone, I believe in rebuilding the economy of our country to one that will be able to perform better in terms of growth performance than it is able to do right now.
2. The basis of growth performance for the financial year 1999/2000 as predicted in the budget itself provides us with an indication of the seriousness of the medium to long term predicament in which we currently are. The budget was drawn up on a forecast of 1,8% for the 1999/2000 fiscal year, 3,2% for 2000/2001 and 3,8% for 2001/2002.
According to GEAR, a goal of 6% was set for the year 2000.
3. The reason why I am mentioning these forecasts and goals is to emphasise the need for the economy to perform better in terms of growth and the amount of slippage which has already occurred in that growth performance over a relatively short period of time.
4. The causes for that slippage are many in number and wide ranging in characteristics and on the basis of our ideological differences we will tend to focus on different sets of these causes.
I want to focus on two sets of those causes i.e.
external and internal - not totally unrelated to each other.
5. Externally, we are characterised as an emerging market country and in that capacity vulnerable to shocks which originate in other parts of the emerging market world.
Our best reaction to that is to accept it as given and adjust our own internal situation in such a manner that we will minimise the potential damage caused by externally driven crisis.
On balance, yesterday's budget was another, extremely important step in that process of building and rebuilding our credibility in the international economic arena. The so-called policy gap between what is the global norm and our own history of delivering credible policy is closing down rapidly because we have an overall comprehensive Macro Economic Strategy and we are showing our determination to stick to the policy goals as spelled out in that strategy.
Broadly these goals are expressed in the final budget outcome, the deficit before borrowing and particularly the process of winding it down to our target of 3% of GDP over time.
Although, it is not the topic of this afternoon's discussion, monetary policy and the inflation target is of equal importance in this process.
The conclusion is simply that our best possible strategy in defending ourselves against externally driven financial shocks is to follow credible, sustainable macro economic policies focussed on internal economic stability.
Internal Economic Policy
6. Internally, our task becomes more difficult because we have to focus our attention on those weaknesses in our economic system which render us vulnerable in the global environment.
These structural economic weaknesses on which we have to focus our policy actions are best illustrated by the so-called macro-economic imbalances which influence our ability to improve overall economic growth performance.
(i) The Savings/ Investment gap
The net national savings ratio to GDP is heading for 13%, coming down from well over 20% a decade ago. Government itself is making its contribution to this dismal performance by dissaving +/- 4% of GDP. There is no better illustration than this for why it is necessary to bring down the deficit before borrowing and why it is necessary to switch the balance of Government spending away from recurrent spending to infrastructure building.
It is therefore absolutely necessary for the Government to continue to focus its attention and actions on privatisation and restructuring of the public sector. This process must have the goal of reducing expenditure on wages and salaries in the public sector and focussing on improved delivery improved delivery of all public services.
To judge the significance of our national savings performance we need to compare the savings ratio with the investment ratio.
Currently (1998) the investment ratio to GDP is 17,5% - however, to produce let us say 4% growth of GDP we may need as much as a 25% investment to GDP ratio.
With this reality in mind we have to understand that the higher the growth rate we want to achieve the more we need to supplement our savings shortfall with capital flows from those countries with a positive gap between savings and investments.
Summarising, this aspect, the conclusion is that we require a positive inflow of foreign capital to supplement our own savings deficit.
(ii) The continuous negative gap on the external trade and services account of the balance of payments. In absolute terms that gap was +/- R15 bn in 1998, or close to 3% of GDP.
This gap is obviously determined by:
· Our export performance, and
· Our propensity to import - be reminded of the fact that we largely import our capital equipment needed for investment - at the same time we need to continue to liberalise our external trade policy.
Although this particular part of the macro picture is largely the policy focus of the DTI (Trade and Industrial policy) it impacts on the work of this particular portfolio committee.
(iii) I know that I am in danger of stating the obvious - but the net result of these two very important negative macro balances is that we need an uninterrupted inflow of foreign financial capital (both in terms of foreign direct investment and portfolio investment).
This in turn implies that over time our net foreign indebtedness will grow. We have to prevent this growth rate from being out of step with the growth rate of the internal economy - if not, we will create another dimension to our country risk profile.
(If required, the net result of all this is probably a more or less continuous inflow of foreign capital = 4% of GDP).
7. Amongst other things, it is probably a responsibility of this Portfolio Committee, and also of other Committees of Parliament, to assess the impact of the budget and other economic policies on our long term ability to cope with these imbalances - to reduce them where possible - to ensure that they do not jeopardise or compromise our economic future.
8. In SACOB's view, on balance the budget will make a positive contribution to the alleviation of these problem areas by:
· Its impact on the tax burden on companies as well as individuals,
Reducing the deficit before borrowing
by creating a climate of policy certainty, continuation and transparency
- by its balanced and affordable focus on social delivery
However the budget firstly fails to substantially make a difference to our dismal savings performance. Unfortunately, for the past number of years, tax reform took us in the opposite direction by heavier taxation of savings instruments like retirement funds and neglecting to adjust the tax concession with regard to interest earned by individuals. Future budgetary emphasis need to be on promoting savings and discouraging consumption by individuals, as well as the government itself. There is no other way, but to focus attention on the savings ratio - the investment ratio is a given if we want to achieve the necessary growth performance to address poverty and the need for more jobs.
Secondly, more emphasis need to be given to our ability to export. Currently we are not only hostage to the demand by developed countries for our exported commodities, but also our ability or lack thereof, to produce more value added goods for the export market.
In this respect a great responsibility rests on the Minister of Trade and Industry and his support Committee in Parliament. I would like to focus my attention on this issue at the appropriate opportunity in future.
The Minister of Finance has, in his budget, announced that the tax concessions which were previously driven by job creation, location and export ability will not be renewed after September 1999. Broadly we support him in his step to reduce the company tax rate from 35 to 30%. However, we hope that the impact of taxation on investment in especially job creating and export oriented areas of economic activity will again be focussed on after the conclusion of the current research being done by the DTI and Nedlac on this issue. I am therefore expressing the sincere hope that this chapter of our fiscal policy is not closed because we collectively need more evidence before we definitively do so.
In conclusion I want to draw your attention to the most important Macro Economic Gap of all and that is the Gap between those who want jobs and the total number of jobs available - i.e. the rate of unemployment. Every policy measure we consider needs to be finally measured against its ability to reduce this gap.