Group Economist at Sanlam, Jac Laubscher gives us his thoughts.
If there were any surprises in this year’s budget, they were primarily on the positive side.
The Minister not only stuck to his previously announced intentions to proceed with consolidating the finances of the South African government, albeit at a relatively slow pace so as not the jeopardise the expected gradual recovery in the economy, but he even tightened his projections marginally. For example, the projections for net government debt now show debt to stabilise at 38,5% of GDP compared with 39,7% previously, although the commensurate number for gross debt remains at 42,4%.
Slight upward revisions to revenue projections, combined with small downward adjustments to expected expenditure, will result in the budget deficit being on average about 0,5% of GDP smaller in the next three years than projected in the Medium-Term Budget Policy Statement in October 2011. Of course one can still question the feasibility of these intentions because they rely on some debatable assumptions, for example cost-of-living adjustments for civil servants averaging a below-inflation average 5% per annum in the next three years. In fact, the upward revision to the National Treasury’s inflation forecasts in the near term means this assumption is now even more heroic than previously.
The focus of the budget is in the right place, emphasising the pre-eminence of higher inclusive economic growth as the primary and only sustainable way of reducing unemployment, poverty and inequality. The expansion in social grants is coming to an end, with the rate of increase levelling off. To quote the Minister: “Redistribution is not a substitute for economic growth and job creation”. It is interesting to note from the budget speech that the social wage is averaging R3 940 per month for a family of four.
The budget furthermore realises that the private sector is expected to be the primary driver of this process – one only hopes the Government will not be disappointed in its expectations, lending further support to those people in government who are pushing for the state to play a much more aggressive leading role in economic development.
There are numerous measures contained in the budget that will support this trend, for example the much-increased incentive to households to save while government dissaving is also set to be eliminated by 2014/15, and the reduction in taxes on small business and the simplification of tax procedures for them. However, it is regrettable is that even more aggressive steps are being ruled out by a lack of resources.
As expected, the financial burden of the proposed infrastructure plans is to have little direct impact on the national balance sheet and will be carried by state-owned enterprises, development financial institutions, and the private sector because of the lack of manoeuvrability in the national budget. Any increase in the state’s contingent liabilities because of guarantees being granted to public entities to facilitate their access to the capital market and lower their cost of borrowing can nevertheless not be ignored.
An interesting development is the proposed new format for the consolidated government account, creating separate operating and capital accounts, each with its own revenue base and resultant balance. This will help to focus the minds of people in government on the progress achieved in changing the composition of government expenditure in favour of greater capital spending at the expense of current expenditure. This harks back to the 1970s when the government accounts were similarly split.
However, although the spotlight is on the Minister of Finance and the National Treasury on budget day, one should always bear in mind that the budget is nothing more than a summary of the financial implications of the policies followed by government collectively. The budget will therefore only be as good as its implementation by all involved, and unfortunately the capability constraints in the civil service are well documented. Attempts to bypass these constraints, especially where capital spending is concerned, by creating special agencies to execute plans, are welcome, but care should be taken not to effectively raise costs by duplicating dysfunctional structures.
However, no mention is made of the budgetary implications of these proposals, neither of the amounts involved (with the exception of Transnet), nor how they are to be financed and over what time frames. It is also not clear to what extent the plan includes projects that are already in the pipeline and budgeted for. At this stage public sector infrastructure expenditure is budgeted to increase at an average rate of 5,6% per annum in the next three years, declining from 7,8% of GDP in 2011/12 to 6,8% of GDP in 2014/15. These numbers clearly do not support a major new infrastructure drive by Government.
We will therefore have to wait for the Budget to see whether there are any changes to the medium-term budget to accommodate the initiative. The MTBPS nevertheless acknowledges that “financing the economic support package will require significant additional resources”.
The unfortunate reality is that there is no fiscal space to accommodate the jump in government expenditure implied at face value by the infrastructure plan. The regrettably sharp increase in current expenditure in the past three years will haunt the fiscus for many years to come. The National Treasury was therefore spot-on in emphasising in the MTBPS that aligning the public finances with the objectives of growth and development requires a reprioritisation of expenditure. The MTBPS also mentions that excess reserves and cash held by government entities need to be mobilised to this end.
The unavoidable conclusion is that the financing of the infrastructure drive will largely come from public-private partnerships (as foreseen in the National Development Plan) and from persuading institutional investors to take up bonds issued by the semi-government institutions that will be at the forefront of implementation (as hinted in the New Growth Path document). Whether the latter action is necessary is a moot point, as institutional investors will surely not object to taking up bonds issued at market-related returns.
The President’s announcement that he will convene a Presidential infrastructure summit to discuss the implementation of the plan with “potential investors and social partners” points in this direction. My expectation is that the President may well be surprised by the positive response he will receive. Businesses that have been hamstrung in their expansion plans by infrastructure bottlenecks will be only too willing to cooperate in resolving them. Institutional investors have set up a number of funds specialising in socially responsible investment, including infrastructure, in recent years, and the growth of these funds has been restrained by a dearth of investment opportunities more than anything else.