Friday, February 20, 2004

Courtesy of economist extraordinaire and fellow Oxonian, Robyn Evans, a response to Wednesday's Budget Speech:

In the ten years since the ANC came to power the South African economy has been substantially reformed. Historically, the ANC's economic stance has been inherently socialist. As the 1955 Freedom Charter states:

The national wealth of our country, the heritage of South Africans, shall be restored to the people;
The mineral wealth beneath the soil, the Banks and monopoly industry shall be transferred to the ownership of the people as a whole;
All other industry and trade shall be controlled to assist the well-being of the people

Alistair Sparks, in Beyond the Miracle: Inside the New South Africa, describes the moment at which Nelson Mandela realised that in order to generate growth and remove the huge inequalities in South African society, the economy would have to be restructured within a market-driven framework. This moment, if I recall correctly, was at a meeting of the World Economic Forum at Davos in 1993. Mandela was convinced by, amongst others, the head of the Dutch central bank, who effectively told him that the only way South Africa could make it in the tough international economic environment was via the market.

History aside, however, through GEAR, major macroeconomic restructuring emphasised improved industrial competition, reduced inflation, a gradual relaxation of exchange controls, tax incentives to stimulate investment, deficit reduction and budget reform. Ten years later, the macroeconomy is in tip-top shape. Manuel in his speech notes manifestations of this: that consumer inflation halved on average over the last decade, compared to the decade before; that interest on the public debt has fallen by 1.7% since 1996, and that private sector investment growth has averaged 5.4 % per annum over the past ten years. Remarkable achievements and something which Manuel, Mbeki and Mboweni, in my opinion, deserve credit for.

All is not completely rosy, however. Two major factors still need to be addressed: poverty and unemployment, the latter of which has risen by about 10% since 1994, bringing it to close to 42% in 2003. Without addressing the inequalities in our society that are deepened by these two things, no amount of investment or macroeconomic stability will be able to generate the growth that the South African economy is ultimately capable of.So, how does the 2004 budget measure up, bearing these issues in mind?

On the expenditure side of things, it is very encouraging to see an allocation of R3.2 billion for expanding public works programmes and infrastructure development. Job creation in any significant form has been a gaping hole in economic policy since 1994. One hopes that through measures such as this, and through capacity building in provincial and municipal authorities, more people will be absorbed into the labour force. It is also significant that R2.1 billion has been earmarked for the HIV/AIDS treatment programme – something long overdue. Expenditures on health services and social grants have been increased. Most notably, the childcare grant has been raised by the equivalent of R170 per month. The government aims to halve unemployment by 2014 but in the meantime improving public services and accessibility to these services for the poor must be a central focus. The next important initiative is the R700 million allocated to land reform. Given the tragedy that is Zimbabwe, it is clear that land is an area that needs careful and immediate attention. More equitable ownership of land and increased support for land reform are essential both in order to provide resources for small farmers and also to provide incentives for reforming the white-dominated commercial agricultural sector. Finally, an extra R1.9 billion injection into the 'fight against crime' will, one hopes, be channelled constructively by increasing police personnel and infrastructure.

On the revenue side, personal income tax cuts for low-income groups will provide important relief for those on the bottom end of the earnings schedule. The size of the cuts is less than it has been over the past two years, but according to South African economist Magan Mistry at Nedcor, tax cuts were not expected at all. The general fuel levy on petrol has been put up by 10c per litre, which some have argued might serve only to remove from low-income earners what they have gained in tax cuts. Sin taxes will hit hard - smokers and drinkers will again have to tighten their belts or kick their habits. I was interested to read that over the past 7 years, excise duties on cigarette and tobacco products have amounted to 50% of their prices, and will now rise to 52%. All in all this is a socially responsible budget and therefore, I would argue, very satisfying.

Scanning the South African online press, there don't seem to have been any waves caused - the Rand hardly reacted, and most economists thought it was predictable and even boring. Although to quote Dawie Roodt at the Efficient Group, boring is 'not necessarily a bad thing'.


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