No seis­mic shifts

Dis­ap­pear­ance of sur­plus not a prob­lem

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN

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

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