No seismic shifts
Disappearance of surplus not a problem
THE FINANCE MINISTER’S mini-Budget in October – and the main Budget, in February next year – are occasions for Government to nail its macroeconomic colours to the mast. In the mini-Budget later this month Finance Minister Trevor Manuel will provide a three-year bird’s eye view of what Government has in mind.
We can expect the changing of the guard at the presidency to make some presence felt in the figures, although not dramatically so. Manuel himself has said there will be no seismic shifts in the Budget. However, there is likely to be one important change: the Budget surplus pencilled in for next year is expected to turn into a slight deficit.
Against the backdrop of a sagging global economy and Eskom’s cash crisis, there will be little room for manoeuvring in next year’s Budget and it would be surprising if it encompasses a surplus.
The main reason for the changed fiscal situation is that the money Government is pumping into Eskom has been speeded up. Although those funds – R60bn over three years – are a loan, they’re accounted for in the Budget as spending. In terms of the new deal struck with Eskom, Government will lend the public utility R30bn in the next fiscal year. That’s substantially higher than the previous Budgeted amount of R12bn.
It’s no secret that Manuel was reluctant to lend money to Eskom – that’s why the negotiations were so protracted. The previous Budget made a big song and dance about SA’s electricity tariffs being too low. That’s since changed – but perhaps not to the extent that Manuel would have wanted. But Eskom’s crisis illustrates how precarious the surplus was: that it can be wiped out in one fell swoop.
Manuel had pencilled in a surplus of R11,3bn for the 2009/2010 fiscal year. That amount will be completely wiped out by the extra R18bn that needs to go to Eskom.
It goes without saying that’s a superficial way of looking at Government’s accounts, as it doesn’t consider what will happen to growth and inflation. But it’s difficult to envisage economic growth coming to the rescue, given the global backdrop and SA’s own struggles with high interest rates. In February, Manuel budgeted for growth of 4,2% in gross domestic product next year. That’s a far cry from economists’ forecasts of closer to 3%.
However, inflation could come to the rescue to some extent on the revenue side. Inflation helps governments in that it bumps up salaries, leading to a bigger income tax take. It can also help through higher VAT receipts, although that hasn’t been the case in the current fiscal year, when declines in consumer spending outweighed increases in inflation. But the fiscus was further helped this fiscal year by good corporate profitability, despite the slowdown in economic growth. Good corporate profitability lagged GDP growth: SA’s fiscus was this year still getting the fruits of past good economic growth. However, that won’t last into the new fiscal year as corporate profitability catches up to the real economy. The bottom line is that, although inflation will be higher than the low 4,9% average pencilled in for next year, some careful budgeting on the revenue side will be required.
The question is what kind of message the disappearance of the surplus will send. Will it look as though Manuel caved in to the pressures from the Left, where a Budget surplus was never possible?
“Not so,” says Sanlam economist Jac Laubscher. “Manuel and his team made it very clear the surpluses were a cyclical phenomenon. During good economic times SA would run a surplus and that would change when economic conditions changed.” Laubscher says a deficit of 1% of GDP would be “fine”.
Laubscher says there’s a lot of “noise” coming from political and labour quarters with regard to macroeconomic policy, which makes it difficult to distinguish between what’s likely to happen in a future post-Manuel. However, Laubscher’s view is that there’s no reason to believe yet that Manuel’s good work will be undone.
Manuel will also announce in his mini-Budget that SA’s new inflation target will be inflation as measured by the consumer price index (CPI) and no longer CPIX (CPI excluding mortgages.) He’s also expected to reiterate the target band is 3% to 6%. That comment may anger the SA Communist Party, which recently reiterated its stance against inflation targeting.
When Manuel unveiled the Growth, Employment and Redistribution (Gear) strategy the Budget deficit was 5,4% of GDP. Manuel successfully tackled the debt mountain and freed up billions of rand for social spending.
Tackled the debt mountain. Trevor Manuel