COMMENTS ON THE 2003 MEDIUM TERM BUDGET POLICY STATEMENT (MTBPS)
- Macroeconomic Perspective
From an economic perspective, the 2003 MTBPS should not only be evaluated in terms of its effects on the broad economic goals, namely economic growth, inflation, employment, the balance of payments and income distribution, but also in terms GEAR’s strategies, and to what extent it would underpin the Growth and Development Summit (GDS).
Since the 2000 Budget, FEDUSA in its comments on the Budget, consistently stressed the importance of job creation via higher investments by government, the private sector and via foreign direct investment. FEDUSA also urged government to play a more active role in the economy, given the seriousness of the unemployment problem, and is therefore delighted at the large focus that is placed on job creation and government investment in the 2003 MTBPS.
Up to 2002/03, macroeconomic considerations received high priority, which is illustrated by the fact that the budget deficit came down from 5.8% in 1996/97 to not more than 1.2% in 2002/03. Since than, there was a shift from macroeconomic stability to a microeconomic focus on an increase in investment and economic growth. It is however only in this MTEF period that bold steps are taken by government to uplift the economy to a higher growth and employment- creating path.
2. Economic Assumptions Underlying the Budget
The vulnerability of South Africa, as a small open economy was again
clearly illustrated this year, when the economy was affected by foreign
economic developments.
In his economic outlook in the beginning of this year, the Minister expected
economic growth to pick up to approximately 4 percent over the MTEF
period, while inflation was expected to fall within the 3 – 6 percent inflation
targets. Although it is still expected in the MTBPS that the inflation targets
would be reached, it is now forecasted that economic growth would be
lower. For 2003 it was adjusted downward to 2.2% from 3.3% but would
rise to 4% in 2006. This was necessary because of the effects of the global
downturn and the appreciation of the rand on South Africa’s exports that
negatively affected economic growth. It is however still envisaged by the
Minister that capital formation will remain on its current higher level. These
macroeconomic forecasts are shown in the graph below.
The actual realisation of these economic variables will eventually be determined by global developments. The growth estimates seem reasonable in the light of the upturn in the USA and the expected turnaround in the EU and Japan.
Regarding the expected lower inflation, a word of caution is necessary. During the last few years the rand / dollar exchange rate played a large role in South Africa’s inflation. The strong rand was caused by different factors, although the role of the weaker dollar should not be underestimated. The weaker dollar during this year was caused by a deliberate policy by the US government to stimulate its exports. Latest figures show that this actually brought the desired outcome, if the economic growth rate is considered.
A stronger US economy would lead to a stronger dollar, which in time would again lead to a weaker rand. It is therefore not unrealistic to assume that once this happens, our inflation rate will again be affected negatively. A further worrying factor, which may not bode well for inflation, is the composition of our foreign investment. The investment flows during the last year or two consists to a great extent of portfolio investments, in other words short term investment or so-called hot money Although it would seem as if large foreign investors no longer regard all developing countries as equals, the possibility of short term capital outflow should always be kept in mind. Gearing monetary policy to take account of possible adverse developments is therefore necessary. The amendment of the way in which inflation targets are determined is a step in the right direction.
- The 2003 MTBPS
This year’s so-called mini budget contains two important economic policy developments, namely to take the more active involvement of government in promoting economic development a step further, and also in affect acknowledge that adherence to annual inflation targets could harm economic growth because it could lead to excessive interest volatility. FEDUSA agrees with these developments.
In the 2003/4 budget the growth and development role of the budget was acknowledged. It was probably the first time that the development role of government was spelled out in such a clear way. It was stated that both the market and government has their respective roles to play to increase economic development. In the Budget Review it was stated that there should be " a robust balance between market-based institutions and a development state".
In the 2003 MTBPS important steps are taken to give affect to more active government involvement in promoting sustainable employment- creating economic growth and development. More government involvement implies higher expenditure and therefore a higher budget deficit. In the MTBPS it is clearly stated that a larger short- term budget as a counter-cyclical instrument should be reconcilable with medium term sustainability. It is envisaged that the deficit would increase from a low 1.2% in 2002/03 to 3.2% in 2004/05, where after it would again fall to 2.8% in 2006.
In the MTBPS it was announced that inflation targets would remain between 3% and 6%, but that targets will be specified as a continuous target rather than the existing annual target. Further that the escape clause would be changed to an explanation clause rather than the existing formal one. In terms of the new targets, inflation was already within the targets in September 2003.
- Fiscal Framework
Total expenditure, revenue and the budget deficit are shown below.
|
|
2002/03 |
2003/04 |
2004/05 |
2005/06 |
2006/07 |
|
Total expenditure |
291.8 |
331.5 |
367.5 |
403.1 |
435.3 |
|
Per cent of GDP |
26% |
27.5% |
28% |
28% |
27.7% |
|
Total revenue |
278.4% |
299.9% |
325.7% |
357.8% |
391% |
|
Per cent of GDP |
24.8% |
24.8% |
24.8% |
24.8% |
24.8% |
|
Deficit |
13.4% |
31.6% |
41.8% |
45.4% |
44.3% |
|
Per cent of GDP |
1.2% |
2.6% |
3.2% |
3.1% |
2.8% |
The table shows that both the total expenditure and the total revenue ratio to
GDP would be maintained at acceptable levels, and in line with the GEAR
strategy. Government does not plan to forfeit fiscal discipline.
5. Expenditure Policy
The 2003 MTBPS underpins the GDS agreement to expand the public work
program to create jobs; to revitalise and maintain public infrastructure and
to accelerate investment expenditure; and to expand access to learnership
opportunities. An important expenditure step announced in the MTBPS is
roll-out of anti-retroviral drugs and supporting measures for controlling
HIV and Aids.
The 2004 MTEF framework provides for an average increase in non-
interest expenditure growth of 4.4% in real terms. A large part of this will
go to provinces and local authorities for infrastructure development.
The real increase in capital expenditure for the fiscal year ending is shown
below.
|
|
Real infrastructure expenditure growth |
|
|
2003 |
2004 |
2005 |
2006 |
2007 |
|
National |
0.0 |
27.3 |
15.1 |
8.4 |
0.9 |
|
Provincial |
7.4 |
38.4 |
2.1 |
7.7 |
0.9 |
|
Municipalities |
2.7 |
2.9 |
1.9 |
0.3 |
0.9 |
The table shows high real increase in capital expenditure for 2003/04 to 2006/07 for national departments and provinces.
These large increases in real expenditure will without doubt also lead to higher economic growth and employment. As this larger expenditure is linked to skills development, this would also lead to sustainable growth and employment. The idea behind this approach is that when the programs come to an end, the skilled workers could be absorbed in other productive activities.
The table below also shows that over the MTEF period government budgeted for large real increases in education, health and welfare services. This would enable government to protect the vulnerable section of our society in the interim period.
Although some inroads in the fight against crime was made during the last few years, figures published in the MTBPS shows that crime is still at unacceptable levels. The table shows that government budget for relative large real increases in expenditure on protection services.
|
Real increase in services |
|
2003/04 |
2004/05 |
2005/06 |
2006/07 |
|
Education |
5.2 |
3.9 |
0.8 |
1.3 |
|
Health |
7 |
5.3 |
3.7 |
3.8 |
|
Welfare and social security |
13.7 |
7.8 |
9.7 |
4.8 |
|
Justice, police and prisons |
5.2 |
5.3 |
2.9 |
1.8 |
Government is commended on the bold steps taken to increase its
infrastructural expenditure and on social and protection services.
6. Taxation Policy
Given the broad economic developments mentioned above, it is
understandable that tax revenue would be lower than expected in the
beginning of this year. Although a part of the higher revenue increase in
the last few years can be attributed to an improved tax collection by SARS,
it should be kept in mind that a large part also consisted of taxation
through inflation, or the so-called fiscal drag. This in fact implies that
some redistribution took place via inflation taxes. During 2003 tax revenue
is lower because of lower economic growth as well as lower inflation, in
other words lower inflation taxes. Lower expected future inflation will
without doubt also affect government’s revenue.
Revenue for 2003 will be lower than budgeted for by about R5 billion. The
Minister however indicated that there will still be scope for some tax relief
to compensate for fiscal drag.
During the MTEF period the existing tax incentives will underpin the steps from the expenditure side to increase job-creating growth. These include the tax incentives to rejuvenate inner city buildings, accelerated tax depreciation for the refurbishment and construction of new buildings and incentives to encourage investment in productive assets, research and deductibility of start-up costs.
It is also mentioned in the MTBPS that the long overdue tax treatment of retirement funds will be resolved.
7. Conclusion
The 2003/04 budget distinguished itself from previous budgets in that the
growth and development role of government is spelled out in no uncertain
terms. In the MTBPS actual steps are taken to give substance to this.
Government is commended for its bold steps to step up sustainable job-
creating growth, without forfeiting economic stability. The turn around
Government investment that decreased in all spheres of government during
the last couple of years is welcomed. Fedusa is convinced that these steps
will actually lead to a new area of higher growth and more employment.
One aspect however that should never be underestimated is external
factors. Government is urged to put in place innovative structures to soften
the impact of these shocks on the economy. The amendment of the
inflation targets is a step in the right direction.