FEDERATION OF UNIONS OF SOUTH AFRICA (FEDUSA)

COMMENTS ON THE 2004 BUDGET POLICY STATEMENT

Macroeconomic perspective

From an economic perspective, the 2004 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).

 

ECONOMIC ASSUMPTIONS UNDERLYING THE BUDGET

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.

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.

The amendment of the way in which inflation targets are determined is a step in the right direction.

The 2003/2004 MTBPS

This year’s 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 2004 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 the2004 budget 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. 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.

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.

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.

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 infra structural expenditure and on social and protection services.

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.

 

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.