Response to Budget 2008

1. Fiscal Policy

In a global economic environment which both government and independent analysts regard as the least favourable in recent years, it should have come as no surprise that the budget was a cautious one and that the Minister’s tone was cautionary. Growth and revenue expectations have been adjusted downwards, and government expenditure is set to increase at a significantly slower rate than in preceding years. Surpluses are again budgeted for to provide further reserves against unfavourable developments.

Government expenditure increased by real rates of some 10% in recent years, and government’s share of total expenditure in the economy increased to about 27% of GDP. The 2008 Budget, on the other hand, proposes a real rate of increase of about 6% and a share of government in the economy which neither increases nor decreases. Further gains, in the sense of higher social returns for every Rand taxed and publicly spent, will have to come in the form of better allocative and operational efficiency on the part of government, rather than more money being appropriated.

The problem, on a modest scale, is really that the economy faces lower than expected growth coupled with higher than expected inflation. A budget deficit could be run to add to aggregate demand and stimulate growth, but this would add demand-side inflationary pressure to what is essentially supply-side driven inflation stemming from high oil prices, bad harvests, salary re-negotiations and bottlenecks in key domestic sectors. Deficits would also reduce domestically available loanable funds for both public and private sector borrowing, though the extent of this is difficult to determine.

On the other hand, of course, a positive budget balance means that government is saving in a period that, whilst certainly not technically or in spirit a recessionary one,  does threaten to jeopardise key growth targets as presented in ASGISA. National Treasury has itself indicated that the South African economy is unlikely to be growing at a real rate of 6% in 2010, as ASGISA hoped. No easy means exist to reconcile growth and inflation objectives, and the useful notion of the budget as a balancing act remains relevant.

2. Polokwane and the Budget

Not surprisingly, the proposals adopted at Polokwane by the ANC’s National Executive did not feature directly in Budget 2008, for a number of reasons. Firstly, the South African budget, as any other government’s budget, is the result of a complex and lengthy series of negotiations and trade-offs. Much of it is also ‘non-discretionary’ in the sense that it represents allocations to commitments which precede the current year and will extend beyond it.

Regarding the content of Polokwane policy proposals themselves, they are also worded quite cautiously, using words such as ‘progressively’, ‘gradually’ and the like. Some, such as extension of the child support grant eligibility age, emanate quite clearly and logically from existing allocations. Thus, cost and budgetary implications are comparatively easy to determine. Others are vaguer and/or less backed by research, and will not find themselves in the budget until more work is done on them.

3. Social Spending and the Division of Revenue

The 2008 Division of Revenue sees some reprioritisation away from national government to provincial governments and municipalities. Over the medium-term, national government’s share of nationally raised revenue is set to decline from 50.5% in 2007/2008 to 48.1% in 2010/2011. The provinces’ share increases from 41.9% in 2007/2008 to 43.6% in 2010/2011. Lastly, the local government share rises from 7.6% in 2007/2008 to 8.3% in 2010/2011. The provincial increases are explicitly linked to the need to “strengthen provinces’ ability to ensure access to quality schooling, health care, social welfare services and housing.”  The reporioritisation of the local share reflects the need to speed up delivery of household services. The increases in the total shares going to provincial and municipal spheres represent increases of equitable share as well as conditional grant allocations. From 2007/2008 to 2008/2009, provincial conditional grants increase at a faster rate than provincial equitable shares. The provincial equitable share increases by a nominal rate of 15.3%, whilst provincial conditional grants increase by 19.5%. On the other hand, the local equitable share increases by 20.3% whilst local conditional grants increase by 3.1%.

4. Social Grants

Caution is reflected in the scope of adjustments to social grant expenditure. Whilst expenditure on this function totalled R 62.5 billion in 2007/2008, 2008/2009 provides for a nominal increase of 13.3% to R 70.7 billion. This amount reflects extension of the child support grant eligibility age to 15 in January 2009, some lowering of the state pension eligibility age for men, and inflation-adjustments to grant amounts.

However, these increases do not reflect any further reprioritisation. Grants as a share of GDP remain constant at 3.3% for 2008/2009 and 2009/2010, and are estimated to decline to 3.2% in 2010/2011. Furthermore, although the grants have been adjusted in line with changes in broad consumer inflation indices such as the CPIX, the inflation rate for items which make up the lion’s share of poor households’ budgets is likely to continue to remain higher than this. Food prices, for example, increased by 10.3% in 2007.

How much would a more radical expansion of, say, the child support grant cost? Back of the envelope calculations suggest the sums involved are quite modest.    Assuming unchanged poverty rates and a rate of grant uptake comparable to that experienced to date, the fiscal burden of extending social grants to vulnerable children aged 15-18 would still be less than R10 billion in 2010/11. Even R 10 billion would only entail that total grants expenditure amount to about 3.6% of GDP in 2010/2011 rather than the 3.2% currently proposed. Greater emphasis on this grant specifically is appropriate given the unqualified obligations imposed on the state by the Constitution when it comes to the rights of children.

5. Eskom

It is anticipated that Eskom’s capital expenditure will amount to about R 343 billion in the period from 2008/2009 to 2012/2013. About 73% of this will fund increased energy generation capacity. Government will lend about R 60 billion to Eskom to cover medium-term cash flow requirements. Essentially, however, government is arguing that true economic pricing of electricity is required in order to reduce consumption and align it more closely with current and medium-term supply capacity. This amounts to adjusting electricity tariffs so as to ensure that the cost of capital expansion is recovered from users.

A number of issues need to be considered and debated further in this regard. One is the extent to which such tariff adjustments will be concentrated on households and small businesses relative to large industrial users, who account for the larger share of energy demand in South Africa. A second is measures to ensure that poor households continue to receive free basic energy and that municipalities remain in a position to provide this sustainably. Adjustments in the local equitable share determination may become necessary over time.

6. Responses to the Budget

Given various political and other developments since the 2007 Budget, the 2008 Budget was preceded by a fair amount of speculation and melodrama. What is perhaps most astonishing is the wide approval of the budget across a range of political and ideological positions, with the exception of the People’s Budget Coalition (COSATU, SACC and SANGOCO). The Cape Times on February 21, for example, reports in an article entitled ‘Manuel gets thumbs up from almost everyone’ that the Minister left “most opposition parties, analysts and comrades, with little to complain about.” To some extent this no doubt reflects a budgeting process which has become increasingly adept at recognising and negotiating political, economic and social trade-offs. On the other hand, the ‘consensus’ partly stems from a large asymmetry between the resources available to government for developing and marketing its budget, and that available to civil society, Parliament and other analysts.

Commentary on the budget from outside government tends, under such circumstances, to take government’s basic interpretation of significant trends for granted and proceed from there, since it may have little independent credible research to draw on. The parameters of the debate, in other words, are very much pre-established and comments on the ‘budget’ tend to take rhetoric at face-value and tinker on the margins of issues. It is not that the budget documents are not to be trusted, or of deliberate mystification or distortion of facts by government. But further budget research and advocacy capacity would go a long way to deepening the budgetary debate. Next year we may then not get such broad agreement.