Budgets addresses growth constraints
Long-term sustainability of growth dependent on reducing poverty
THE ACCELERATED GROWTH seen recently in South Africa could lead to constraints in the economy due to a lack of economic infrastructure and skills, but the latest budget addressed those issues, deputy director general of the Department of Trade and Industry Lionel October said at a GIBS budget 2007 review.
“Nobody predicted this economy would grow at the rate that it did,” October said. The private sector appeared to have suffered from a “failure of optimism” and had underinvested. Many companies could expand production, but there was insufficient capacity in the country’s rail, roads and ports infrastructure, he said. These factors could influence economic growth.
However, of the almost R90 billion allocated by Finance Minister for extra spending for the next three years – a significant amount was allocated for infrastructure and that dealt “very decisively” with how to solve the infrastructure backlog. But October cautioned that the problem was not just the spending, but also having the skills to build the roads and the ports. Civil engineers had left municipalities and major state organisations.
Spending on education and skills was a significant feature of the budget as the country was not producing enough maths and science students, and, not enough graduates. Further education and training colleges had also been seriously neglected, so education and vocational training formed a significant part of getting the economy moving.
But ultimately economic growth deals with expanding the real economy, the private and manufacturing sector. Certain sectors in business had been identified for growth and the budget included incentives for these, which included call centres, the chemical, aerospace and paper and pulp industries, and they would be actively supported in various ways.
There was debate over whether government should intervene in private business but October felt the two complemented each other and he did not believe business would become lazy because of this.
The introduction of a poverty index (to be run by Stats SA) was a significant intervention in tracking poverty properly and if 500 000 jobs could continue to be created every year it would make a serious dent in unemployment.
Because of the legacy of unemployment, and poverty being highest in the former black homelands, there was a need for targeted regional industrial strategies, as is done in Europe, he said, referring to a proposed social security framework that would include a wage subsidy.
Ernie Lai King, head of Deneys Reitz’s tax division, said the budget contained some “bold moves”, with the surplus of around R30 billion giving Manuel “incredible leeway with what he could pull out of the bag”. This included abolishing retirement tax and reducing corporate tax.
The proposed savings/provident fund was successful in Singapore at providing working class citizens with a sense of security and had created socio-political security, King said.
From October 1 the secondary tax on companies (STC) would be reduced from 12,5% to 10%, added on to corporate tax of 29%. STC would be gradually phased out and replaced by a dividend tax, which would be easier for investors to understand.
South Africa would still have to renegotiate some of the double tax treaties in its extensive tax treaty network and King wondered whether South Africa could have an imputation system where investors received a tax credit for dividends for corporate taxes already paid.
T-Sec chief economist Mike Schussler said that the national budget was going up severely as a percentage of Gross Domestic Product (GDP) (27,5% in 2007/2008) and that South Africa was “spending like a rich country”.
Reports that spending on the police had increased were “false information”, said Schussler. Spending on the police had actually fallen to 3% of GDP. Spending on education had also decreased as a percentage of GDP from 7% in 1998 to 5,4% in 2007. He believed that the government was placing too much emphasis on social welfare spending but not enough on economics.
He expressed concern about having 2,3 people receiving welfare benefits for every registered taxpayer, believing this would become unsustainable. He added that over 600 000 firms paid VAT and about half of those paid PAYE. They employed about four million taxpayers and so about 1,5% of the population paid about 90% of taxes. If one of those firms closed down the dependency rate – about 32 people per real firm – would increase and assuming every worker has 2,5 dependants then the dependency rate is higher and could be as high as 63 people with the entrepreneur, per VAT-paying firm.
He questioned why tax money was being given to state owned enterprises that were not healthy. He also asked why R25 billion was given to the SA Customs Union – money which was later channelled to and used by some SA Development Community countries to create tax incentives that diverted foreign investors away from South Africa.
Kuben Naidoo, head of the budget office at the National Treasury, said there was nothing wrong with having a budget surplus and that it could provide for a rainy day. Tax revenue had grown by 17,4 percent a year for the last four years, the economy was growing at about a 10 percent nominal rate and company tax and revenue had almost trebled in the past six or seven years.
Economic growth was cyclical so it did not make sense to give back on tax cuts because taxes would have to be raised later. One option was to spend the surplus on once-off things like stadiums (an additional R13,3 billion for infrastructure for the Fifa Soccer World Cup in 2010), he said.
Naidoo said European countries that South Africa’s budget is compared with don’t have South Africa’s history of inequality and that the long term sustainability of growth was dependent on reducing poverty.