FEDUSA COMMENTS ON THE 2004 MEDIUM TERM BUDGET POLICY STATEMENT (MTBPS)

 

  1. MACROECONOMIC PERSPECTIVE
  2. Government is commended for the consistent way in which it has set its budgets over the last couple of year to further the general economic policy goals of economic growth, inflation, employment, the balance of payments and income distribution, but also its GEAR’s strategies. Government’s budget policy can be divided in basically into two periods, namely, up to 2002/03 when the focus was on macroeconomic stability. The second period started during 2002/03 when Government turned its focus on microeconomic issues such as an increase in investment and economic growth. In this year’s MTBPS this process of stepping up its efforts to increase investment, and therefore economic growth and employment, is accelerated and commended.

    Given the severity of South Africa’s unemployment and poverty problem, FEDUSA fully supports Government’s policy steps to alleviate these problems. 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 crisis, and is therefore delighted at the continuous and bold steps that are taken by government to uplift the economy to a higher growth and employment- creating path during the 2004 MTEF period.

    The Minister also announced an important further step in the abolishing of exchange control, namely, to abolish exchange control limits on new outward foreign direct investment by South African corporates, and to retain foreign dividends offshore. This will without doubt have a favourite effect on foreign direct investment in South Africa and also contribute to a more stable exchange rate of the Rand.

    The Minister re – affirms Government’s inflation targets of between 3% and 6%, to be adjusted on a continuous basis during the year. As in many countries, inflation targets will have a positive effect on economic growth and inflation. Recently, it was announced that the Nobel price for Economics was awarded to Professors Kydland and Prescott, who proposed inflation targets as a way to combat the so-called stagflation problem. Many countries that have adopted inflation targets have already reaped the benefits thereof.

  3. ECONOMIC ASSUMPTIONS UNDERLYING THE BUDGET
  4. In his economic outlook in the beginning of this year, the Minister expected economic growth to pick up to approximately 4 percent in 2006 over the MTEF 2003 period, while inflation was expected to fall within the 3 – 6 percent inflation targets. Although it is still expected in the 2004 MTBPS that the inflation targets would be reached, it is now forecasted that economic growth would be slightly higher. Capital formation is adjusted upward from the estimates during this year’s budget. It is expected that capital investment would be more than 8 percent during the MTEF period.These economic forecasts seem to be realistic. The forecast for economic growth is in line with forecasts by most economists. Stats SA is in the process of adjusting their data on economic growth to better reflect the current production structure. This alone will probably bring the growth rate to about 4 percent. Although the possibility of rising inflation due to an oil – price rise and a depreciation of the Rand cannot be excluded, the chance of this happening is slighter than previously. It is generally accepted by oil price experts that there is an oversupply of oil in the long term. Although there are short term hick ups, the long-term movement of the oil price is downward. The favourable developments regarding exchange control also suggest a lower inflation rate.

    These macroeconomic forecasts are shown in the graph below.

    Macroeconomic projections [Budget figures] (MTEF 2003 figures)

     

     

    2002

    2003

    2004

    2005

    2006

    2007

    Real

    GDP

    Growth

    3.6

    [3,6]

    (3,0)

    1.9

    [1,9]

    (2,2)

    2.9

    [2,9]

    (3,3)

    3.9

    [3,6]

    (3,7)

    3,7

    [4,0]

    (4,0)

    4.2

    Gross

    Fixed

    Capital

    Formation

    6.1

    [6,1]

    (6,5)

    8.4

    [8.3]

    (7,7)

    9.6

    [6,6]

    (6,1)

    8.2

    [6,9]

    (6,7)

    7.7

    [7,3]

    (7,0)

    8

    GDP

    Deflator

    10.1

    [10,1]

    (8,5)

    5.9

    [5,7]

    (5,8)

    5.7

    [4,8]

    (4.6)

    4.9

    [5,9]

    (5,9)

    5.3

    [5,1]

    (5,0)

    5.2

    In the 2004 MTBPS important further steps are taken to give affect to more active government involvement in promoting sustainable employment by creating economic growth and development. More government involvement implies higher expenditure and therefore a higher budget deficit. The Minister budgets for a real increase in expenditure of 4.3 percent over the MTEF period.

    In the 2003 MTBPS it was envisaged that the deficit would increase from a low 1.2% in 2002/03 to 3.2% in 2004 / 05, whereafter it would again fall to 2.8% in 2006. For the 2004 MTBPS, it is envisaged that the deficit will increase from 2.4% in 2003/04 to 3.5% in 2005/06, whereafter it will again fall to 2.7%.

    1. Fiscal Framework
    2. Total expenditure, revenue and the budget deficit are shown below. The figures for the 2003 MTEF are shown in brackets.

       

       

      2003 / 04

      2004 / 05

      2005 / 06

      2006 / 07

      2007 / 08

      Total

      Expenditure

      328. 7

      (331.5)

      371.7

      (367.5)

      413.6

      (403.1)

      449.7

      (435.3)

      488.2

      Percent of GDP

      26.7 %

      (27.5%)

      27.7%

      (28%)

      28.2%

      (28%)

      28.1%

      (27.7%)

      27.8%

      Total Revenue

      299.4

      (299.9)

      328.2

      (325.7)

      363.0

      (357.8)

      399.1

      (391)

      440.5

      Percent of GDP

      24.3%

      (24.8%)

      24.5%

      (24.8%)

      24.7%

      (24.8%)

      25.0%

      (24.8%)

      25.1%

      Deficit

      – 29.3

      (– 31.6)

      – 43.5

      (– 41.8)

      – 50.6

      (– 45.4)

      – 50.6

      (– 44.3)

      – 47.7

       

      The table shows that both the total expenditure and the total revenue ratio to GDP could be maintained at acceptable levels, and in line with the GEAR strategy. Government does not plan to forfeit fiscal discipline. As discussed below, it would in future probably be much more difficult to maintain this balance between growth and stability goals, as the higher deficit will lead to higher debt costs that will erode expenditure on social and economic services in future.

    3. Expenditure Policy

    The 2004 MTBPS, as was the case of 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

    As stated above, the 2004 MTEF framework provides for an average increase in non-interest expenditure growth of 4.3% in real terms. A large part of this will go for infrastructural investment. It is projected in the MTBPS that infrastructure investment will go up from 5.3% of GDP in 2001/ 02 to 6.5% of GDP in 2007 / 08. This large increase is driven partly by transfers from the national government to provinces and municipalities. This large capital outlay on infrastructure would without doubt lead to higher economic growth and employment creation. 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. Whether this large planned capital expenditure will actually realise, will in the end depend on the capacity of the different tiers of government and the functioning of the SETA’s on effective public/private sector partnerships.

    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 were made during the last few years, crime is still at unacceptable levels. The table shows that government budget for relative large real increases in expenditure on protection services.

     

     

     

     

     

     

    Percentage growth in selected consolidated national and provincial votes (Real)

     

     

    2004 / 05

    2005 / 06

    2006 / 07

    2007 / 08

    Education

    5.0

    2.8

    1.6

    1.6

    Health

    2.1

    5.3

    3.9

    1.9

    Welfare and Social Services

    18.8

    12.1

    6.3

    0.5

    Defence

    – 5.0

    6.2

    – 3.0

    – 5.8

    Justice, Police and Prisons

    7.3

    6.8

    3.2

    2.3

    Interest

    2.0

    1.8

    4.2

    4.2

    Thus far, the funds provide by a lower budget deficit was used as one source to increase

    public expenditure on social and economic services in real terms. The table above shows

    that it would again be possible in the 2004 MTEF period. The table however also shows

    that the cost of servicing our debt is starting to rise, and again, as in the past will be an

    inhibiting factor to increased social expenditure.

    Government is commended on the bold steps taken to increase its infrastructural expenditure

    and on social and protection services.

  5. TAXATION POLICY
  6. For the MTEF period, it is projected that the tax burden, in other words, total revenue to GDP would remain at approximately 25%. The table below shows that taxes on persons and individuals, companies and VAT would make up approximately 82% of total tax revenue of the national budget. It is estimated that the contribution of the tax on persons and individuals will remain just under 33%. The contribution of companies will fall somewhat from 22.4% in 2003/04 to 21.3% in 2007/08, while VAT will increase from 81.9% to 82.5% for the same period.

    Selected taxes as percentage of total tax revenue

     

     

    2003 / 04

    2004 / 05

    2005 / 06

    2006 / 07

    2007 / 08

    Persons and individuals

    32.8%

    32.9%

    32.9%

    32.7%

    32.9%

    Companies, including STC

    22.4%

    21%

    21%

    21.2%

    32.3%

    VAT

    26.7%

    27.9%

    28.3%

    28.4%

    28.3%

    Total

    81.9%

    81.8%

    82.3%

    82.4%

    82.5%

    FEDUSA noted that there will not be much scope for tax relief in the 2005 Budget, but that the taxation of small businesses will be reduced. It is also noted that the Minister indicated that an amendment of the tax treatment of medical scheme membership, is considered.

     

    FEDUSA, however, would like to call for a consultative process, which will allow relevant stakeholders to input on the effect that such taxation changes might have to the respective membership. A process which involves due consideration and consultation would be advisable. FEDUSA notes with concern that there will be a stricter treatment of travel cost that can be claimed against the existing motor vehicle allowance.

    The appeal to the public to save has been noted. A relaxation of tax payable on the interest received from savings accounts would be an incentive to increase savings. FEDUSA notes with satisfaction that some progress has been made on the taxation of the retirement fund industry, and is awaiting the discussion paper on the regulatory aspects of pension funds that will be released later this year, and the subsequent tax policy discussion paper. We have been calling for a revision of the taxation rate of pension funds for the last couple of years and are awaiting the discussion paper with anticipation.

  7. CONCLUSION

The 2004 MTBPS reaffirms Government’s growth and development role and FEDUSA wants to commend Government for the bold steps to step up sustainable job-creating growth, without forfeiting economic stability. The relatively large increases in public sector infrastructure spending during the last couple of years is welcomed. FEDUSA is convinced that these steps will actually assist in contributing to a new area of higher growth and more employment.