Bud­gets ad­dresses growth con­straints

Long-term sus­tain­abil­ity of growth de­pen­dent on re­duc­ing poverty

Finweek English Edition - - Economic trends & analysis -

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.

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