Much has already being achieved by government since 1994 to reconstruct the economy in line with the broad social and economic objectives of government. Progress has also being made by government by way of its GEAR strategy to increase economic growth and development, price stability, balance of payments equilibrium and a more equitable distribution of income. There however still exists serious structural problems to be addressed, and this year’s budget must be evaluated against this background.
Although economic growth picked up during the last few years, this did not lead to more employment; in other words South Africa experienced jobless growth.
Employment creation in the economy decreased since the beginning of the 1990’s, especially in the formal non-agricultural sector. During the 1980’s employment by this sector was on average between 45 percent and 50 percent of the economically active population, and is currently just over 25 percent.
As the economy moved through its normal stages of development from the primary sectors such as agriculture and mining to the secondary sectors such as construction, manufacturing and electricity, and later to the tertiary service sectors such as trade, workers become structurally unemployed.
While investment in the declining secondary sector increased moderately, it did not lead to an increase in employment opportunities, but rather use was made of capital-intensive ways of production.
Labour productivity increased the last couple of years, but only because less labour was used in relation to gross domestic product, and not because workers actually became more qualified and therefore more productive.
Savings of both the corporate sector and households decreased as percentage of their income; corporate savings decreased from an average of over 15 percent before 1997, to just over 5 percent in 2002; while household
These serious structural deficiencies require bold steps to correct it. The coming Job and Growth Summit would be an important step in ridding the economy of structural economic problems and FEDUSA wants to commend government on the attention that the Job and Growth Summit receives in this year's budget in anticipation of the Summit later this year.
ECONOMIC ASSUMPTIONS UNDERLYING THE BUDGET In his economic outlook, the Minister expects economic growth to pick up to approximately 4 percent over the MTEF period, while inflation is expected to fall within the 3 – 6 percent inflation targets. Movements in economic growth and inflation, is shown in the diagram below. It is also expected that investment will increase over the MTEF period.
The actual realisation of these economic variables will eventually be determined by foreign developments, especially whether hostilities between the United States and Iraq will lead to a full- scale war. A worst-case scenario of a full-scale war, South Africa will be affected negatively. Rising inflation, such as what happened after the New York bombing incident, would again lead to a stricter monetary policy stance (higher interest rates) which could nullify this year’s expansionary fiscal policy. The recent increase in petrol and diesel prices will already affect future inflation. A positive development is however that the Rand’s appreciation thus far softened the effects of the oil price increase.
The 2003/2004 Budget In this year’s budget the growth and development role of the budget is acknowledge. It is probably the first time that the development role of government is spelled out in such a clear way. FEDUSA totally agrees with this approach, namely that both the market and government has their respective roles to play to increase economic development. As it is clearly stated in the Budget Review that there should be " a robust balance between market-based institutions and a development state".
The Budget affects the economy not only through the value of government’s total expenditure and revenue, but also through the effects of fiscal stimuli for investment and savings and the effects of transfers to the public.
In the next sections the effects of these fiscal measures on government's economic goals, namely economic growth in general and specific elements such as savings and investment, employment, stability and income distribution will be discussed briefly.
Economic growth The Minister budgeted for a budget deficit of 2.4 percent against an outcome of 1.4 percent for 2003/2003. From a macroeconomic point of view, the increase in government expenditure will lead to an increase in total demand and therefore in total spending by both the public and private sector.
Tax relief measures that will further stimulate consumption expenditure and therefore also total demand include the large tax cut of R13.3 billion and the lowering of the tax on retirement funds from 25 percent to 18 percent.
This year’s budget, from a macroeconomic perspective, will lead to higher gross domestic product in nominal or money terms. Whether this will also lead to a real increase in the income of households, will depend on whether this increased demand will also lead to an increase in inflation. It is generally expected that inflation will fall during this year (given no negative external shocks), which implies that the public’s income will increase in real terms. Another question is whether this higher economic growth will increase job opportunities. This aspect will receive attention below.
Savings and investments
Private sector investments depend on both demand and supply factors. From the side of demand, investment depends on the level of consumption expenditure. The increased demand originating from government expenditure and fiscal stimuli would affect investment favourably.
Investment however also depends on the availability of savings and the quality of human resources. Private as well as government savings, as percentage of their incomes are currently at a low level, but are supplemented by foreign savings. For the first time in many years general government will also contribute to the country’s pool of savings. Fiscal stimuli to savings such as the increased interest income exemption announced in this year’s budget would affect savings marginally. Research shows that fiscal measures to stimulate savings only affects savings marginally. The marginal tax rates on both the corporate and individuals affect savings to a much greater extent. Over the last few years there seems to be a negative relationship between savings and taxes in both the private and the business sectors. An increase in the total tax burden leads to lower savings and vice versa.
From the side of this year's budget, savings would therefore probably only is a marginal stimulus for private sector savings. It would however seem as if the current level of savings, supplemented by foreign savings could underpin some increase in investment. The proposed amnesty to those that hold their financial assets illegally overseas could also benefit the level of savings.
Accept for increased demand that would lead to higher investment, the Minister also announced specific fiscal measures to stimulate investment, such as an extension of the accelerated depreciation window period for manufacturing, comprehensive business asset reinvestment relief and accelerated depreciation allowances to upgrade city centres.
Taking all the above factors in consideration, it is expected that investment would increase this year.
Government investment in all spheres of government decreased the last couple of years, exacerbating capital formation in the economy. The figure below shows that economic infra-structural development (roads, bridges, dams etc) and social infra-structural development (schools, hospitals etc.) were responsible for the decrease in general government investment, and from 1999 also investment in economic services (business enterprises, not include in economic infrastructure). Since 2001, investment in economic infrastructure stated to pick up. The diagram however implies that a large backlog developed in economic infrastructure and social infrastructure over the years.
For 2003/2004 the Minister budgeted for a real increase in general government investment of 5.1 percent over the MTEF period. The Minister also indicated that investment in economic services would also start to pick up again. Over many years a huge backlog developed in government infra-structural development. Although it will take time to catch up, the announced budgetary expenditure on infrastructure will contribute to future economic growth.
Employment Looking at past trends, it is however not sure to what extent the increase in total demand caused by budget expenditure lead to higher employment. It will differ from one sector to another. In the secondary sectors, especially the manufacturing sector, investment would probably affect employment only marginally, as the tendency of this sector over the past decade is to move to more capital-intensive production. Increased total demand in the economy would probably lead to more jobs in the tertiary sectors such as trade.
The fiscal stimuli of investment plus increased government infra-structural development will have a favourable influence on employment. Against the background of huge job shredding in the economy over many years, this budget will however only make a small contribution to eradicating the backlog of jobs that developed over the years.
Economic and social stability Domestic and foreign Investment depends to a great extent on the measure of stability, both economic stability and social stability. Government has succeeded to bring inflation under control. The level of crime is however still high and inhibits investment. FEDUSA wants to commend government on steps taken to increase its expenditure on police and the justice system. The additional amount of R2.7 billion for more police and for the streamlining of the justice process provided in this year's budget, and the provision for a real increase in expenditure of over 4 percent for police and 2 percent for the justice system over the MTEF period, will contribute to crime prevention and eventually also to an increase in investment.
Income distribution AS in the past, government is taking steps in the budget to promote a more equal distribution of income. The personal income tax cut of more than R23 billion; increased infra-structural investment in rural areas as well as a continuation of free government services to the poorer sections of the population will make progress with this goal.
Accept for these specific fiscal steps, the budget provides for a real increase in social services of more than 5 percent over the MTEF period. Education goes up on average by 2.6 percent, while social security increases by not less than 9 percent over the same period. These are important steps to bring about a more equal distribution of income.
In the final instance however the availability of job opportunities for the unemployed masses and for new entrants to the formal labour market as well as training and retraining is crucial for the upliftment of people.
Conclusion This year's budget distinguished itself from previous budgets in that the growth and development role of government is spelled out in no uncertain terms. From a macroeconomic perspective, the 2003/2004 budget has laid a sound foundation for future developments and to set the right climate for the job and growth summit later this year. This year's budget will provide an important stimulus for investment and employment creation. There are however, as indicated above, serious structural issues that developed over the years that inhibits investment and job creation and that needs to be addressed. All in all, FEDUSA regards this budget in a positive light and wants to congratulate government on what has already being achieved.