MEDIUM TERM BUDGET POLICY STATEMENT
17 November 2003
Parliament – Republic of South Africa
Despite the prudent nature in which both the fiscal and monetary policies are managed, South Africa remains challenged by the growing incidence of unemployment and the disturbing specter of HIV Aids contraction. It was therefore fitting of the Minister of Finance to announce the largest spending increases in the social services sector in recognition of these realities. Whilst we do not believe that the rise in budget deficit expectation for next year and the subsequent upward revision of current budget deficit numbers reflect divergence from the traditional festoonity with fiscal discipline, we caution any significant break-away from low deficit ratios.
Whilst the strength of the ZAR and the evident slump in global demand squeezed corporate profits, it is our belief that the strength of the ZAR and the disinflationary global economic milieu saved South Africa from an inflationary spiral.
Below are brief comments on the MTBPS mini-budget speech delivered by the Minister of Finance.
2. Social expenditure
Central to the economic success of any country is the reliance on the human capital factor in totality. This refers to the health (package) status and employability of labour. We welcome the assertion that social expenditure imperatives will form the point of departure for Government’s policy in Budget 2004.
Albeit it is a somewhat impossible task to exile poverty to the fringes of obscurity, we believe that the government has found the formula to decisively deal with the twin evil of unemployment and poverty
Responsibly expansionary fiscal policy the panacea for unemployment and poverty
With one in nine people infected with HIV Aids, it is encouraging that the fiscus found it fit to allocate R12.1bn in the fight against the scourge over the next three years. Although that could translate in increases in the budget deficit (as already anticipated) the previous decade of macroeconomic stabilization process, we believe, has sufficiently laid the foundation for limited disruptions in the broad fiscal policy framework.
The proposed public works programme would go a long way to arrest the glaring realities of unemployment and limit the effects of abject poverty. As the country’s poor are excluded in the economic decision making process, the proposed labour intensive public works programme could empower the marginalised and engender their participation in the daily economic exchanges.
The country’s rural poor remain the most marginalized of our society. The proposed labour intensive public works programme should have an obvious bias on the rural poor. Amongst others this will limit the extent of migration to urban areas. Although it is known that it is the economic factor that stimulate the migration, government’s social delivery efforts continue to be somewhat compromised as urban resources are burdened.
Investment in the crime fighting institutions remains one of the important factors for sustainable attraction of foreign direct investment flows.
Increased focus on education spending and the financial balancing support for the amalgamation of the tertiary education regime would go a long way to streamline our education system.
The evident expansionary nature of fiscal policy for the years ahead celebrates the success of the previous stabilization policies that annihilated runaway government spending.
Albeit it is a somewhat impossible task to exile poverty to the fringes of obscurity, we believe that the government has found the formula to decisively deal with the twin evil of unemployment and poverty. The resistance by government to borrow from the capital market despite all-time low price of money attests to the disciplined nature in which fiscal policy has been managed.
With low domestic discretionary savings, a sustained budget deficit rate of increase higher than that for domestic expansion could defeat fiscal objectives
3. Revised numbers
Growth (domestic expansion)
As expected, growth for the current calendar year was revised down to 2.2 percent from 3.3 percent. It was becoming increasingly evident that the 3.3 percent initial forecast was not realistic given the underperformance of manufacturing production and the slump experienced by the all important export sector. The latter suffered from the double whammy of the expensive exchange rate and the subdued global demand environment. Whilst there is some evidence of recovery in the US, it remains less persuasively convincing.
Equally limiting, the high and prohibitive nature of our domestic interest rates last year weakened domestic demand and subsequently increased the price of capital. Consequently growth for the first two quarters of this year inevitably tumbled.
US dollar negative stories and the attendant deterioration in geopolitical relations could continue to be ZAR supportive. And, significantly, the rising dollar denominated commodity prices, support the ZAR as well. This condition, we believe, could spur the ZAR to new appreciation levels. Whilst this is good for the domestic price environment, it could squeeze corporate profits further. In particular, production capacity on export oriented businesses and import substitution concerns, could be reduced. The consequences are fairly evident with rising unemployment. It is in this light that we support business and government initiative to negotiate plausible strategies to limit the extents of ZAR appreciation impact on businesses.
The upward revision of budget deficit numbers to 2.6 percent of GDP against 2.4 percent was inevitable. Whilst this figure will stand government in good stead going forward in that it still is below the 3 percent global norm, its achievement is somewhat threatened by the downward revision of growth. Slower rate of growth normally translate in less revenue collection. At 2.6 percent the revised budget deficit will grow faster than the 2.2 percent GDP expected for this calendar year. With low domestic discretionary savings, a sustained budget deficit rate of increase higher than that for domestic expansion could defeat fiscal objectives.
Next year’s 3.2 percent expected deficit, we believe, is sustainable considering that growth is expected to grow by the same margin as well. Although spending will be funded from increasing borrowing, we do not believe that this could be inflationary.
An important benefit from the strong ZAR has been the lower ZAR costs of servicing foreign debt. Allied with lower interest rates, total debt service costs have subsequently been revised downward by just under R4bn. This avails resources for spending on other pressing social imperatives hence next year’s 3.2 percent deficit is sustainable.
We welcome the retaining of the inflation targets at between 3 and 6 percent. It is our belief that lower inflation environment is a catalyst to growth and attraction of foreign direct investment. Some clarity is needed on the announcement that inflation target will now be expressed as continuous target rather than a yearly average. It is our belief that the Reserve Bank has already been exercising a month by month appraisal of the inflation environment, hence the introduction of MPC meetings every two months.
We welcome the amendments made to the inflation target policy that the Reserve Bank can now exercise an explanation clause rather than an escape clause in the event of shocks to the domestic pricing regime. This will certainly make it easier for the Reserve Bank to manage the inflation environment.
The revision of CPIX down to 6.9 percent against 7.7 percent during the budget is well within rational expectation. We however will question any future downward revision of the top end of the inflation target. As a developing nation with pressing social imperatives, a low inflation regime against high unemployment could become a contentious subject.
It would be a financial nightmare to allocate the responsibility of BEE to market forces
4. BEE (Black Economic Empowerment)
Whilst we advocate that market principles take precedent on matters of determining prices in the economy, it would be a financial nightmare to abrogate the responsibility of BEE to market forces. Government intervention to expedite the BEE process is therefore welcome and somewhat inevitable. With our sordid past of racial economic exclusion, an all inclusive economic participation is pivotal. This will help to de-racialise our economy.
The area of BEE financing is rather complex. We thus applaud government in its tireless endeavors to simplify the process. We remain supportive of an enabling tax environment, amongst others, that seek to create an all inclusive economic milieu.
Government’s broad reforms on the tax front are welcome. In particular the possibility of tax cuts, to relieve consumers next year, could prove stimulatory. In the process government could realize increases in VAT revenue collection as a result of resultant increases in expenditure.
With inflation expected to remain low next year, low personal income taxes would increase consumer incomes. We however need a savings vehicle to trap surplus cash arising from the combination of low interest rates, low inflation and low taxes. It is our belief that increasing savings carry the benefit of allowing monetary authorities to lower borrowing costs. This will allow government to borrow at low interest rates availing resources for other important areas of spending.
We support the extension of the foreign tax amnesty to 29th February but remain cautious of further extensions in the future. Given the transparent nature of the mini budget and the attendant planning certainty it has occasioned, closure is needed on the tax on illegally held off-shore assets.
Although companies are generally incentivised through a number of tax incentives, we believe tax relief for small concerns should be granted next year as has been common over the years.
Albeit the mini-budget presentation had an evident bias on spending on social imperatives, it leaved up to its traditional allure of satisfying the broad-based SA population sector. Government’s evident purport of expansionary fiscal policy next year is a glaring tribute to a decade of fiscal austerity.
It is our belief that the combination of prudent management of the fiscal policy and similar management of our monetary policy, are behind the success story of ZAR recovery. Well done Minister.