Manuel's tough agenda for the next govt

Frans Cronje analyses the significance of the Minister of Finance's budget speech

Watching Trevor Manuel deliver his budget speech was in many respects as useful as its contents. In two off the cuff remarks, one to Zwelinzima Vavi in the public gallery to say less about tax policy, and one to MPs not to look away when he berated them for wasteful spending and careless oversight, the finance minister made it clear that he was losing patience with ill disciplined and ill informed politicians. He warned MPs that how money was spent, not the money itself, would bring about improved living conditions in South Africa. With South Africa now facing a budget deficit of 3.8% the next government faces a fiscal environment very different to that of its predecessor. Growth, as much as redistribution, will have to be prioritised to prevent South Africa from slipping into a debt trap.

Trevor Manuel has set a tough agenda for the next government. They will no longer have the luxury of choosing between growth and redistribution.

The economic policy dilemma facing the next government will be striking a balance between redistribution and growth. The commodity boom that coincided with much of the Mbeki presidency allowed the government to prioritse redistribution in the knowledge that a modest growth rate was almost assured - regardless of domestic economic policy. Trevor Manuel's budget speech made it very clear that that was no longer the case. Certainly the next government will not be insulated against weak domestic economic policy by extraneous factors such as high commodity prices. Tax revenue, employment, and economic growth will for the first time in several years be a more direct reflection of the success of domestic economic policy.  

Declining export earnings, a weak mining and manufacturing sector, and weaker consumer spending will translate into lower growth and thereby lower government revenue from taxation. The result is that current revenue estimates are lower than previously forecast.   With an economic growth forecast for 2009 of 1.2% the government now faces an estimated budget deficit of 3.8%. That deficit must in turn be funded through borrowing which will have to be repaid with interest in future budgets.

While the new government therefore inherits a fundamentally different fiscal environment to that of its predecessor it also inherits the social welfare and infrastructure spending commitments of its predecessor. It is here where the implications of the growth versus redistribution debate become relevant.

Social grants spending today reaches a quarter of all South Africans. In a quarter of households handouts from the state are now the single biggest source of income. At the same time the contribution of these grants to declining levels of poverty has been well established. But they do not offer a way out of poverty or an impetus for growth. Borrowing to fund welfare spending therefore risks placing South Africa into a dangerous downward debt spiral in which state borrowing does not realize a return to fund incurred debt. The dangers of debt were a recurring theme in the minister's speech and sounded a great deal like a warning to those in Cosatu and the South African Communist Party that large budget deficits were not in the interests of the country.

While certain groups on the left of the economic spectrum may welcome a wider deficit to accommodate social spending they ignore critical risks. Chief amongst these are that the falling debt payments in past budgets have freed up finances to be redirected to social spending. Past social spending did not take place despite the prudent financial management of the government but because of it. 
Borrowing for growth is therefore the only borrowing policy option open to the Treasury. The infrastructure commitments, education, rural development, and other budget priorities that are not strictly redistributive but aimed at growth and employment are therefore the most efficient target for borrowing. Trevor Manuel said in his speech that borrowing must be seen as an investment that will pay returns and not to burden future generations of South Africans with debt.  

But the minister also warned that it was not the money itself that would relieve poverty or encourage growth but rather the manner in which it was spent. Wasteful expenditure, capacity problems, and failed government programmes needed to be stopped. Spending needed to be monitored more closely by Parliament to ensure that it paid returns.  His warning to MPs not to turn their heads away from him while he made remarks about wasteful advertising, travel, and consultancy costs was a direct jibe at those in government and the ANC with whom Mr Manuel appeared to have lost patience.

The next government will also have to face the fact that its weak education system and permanent skills deficit will make it even more difficult to ensure that the debt on the investment made by borrowing can again be repaid. The minister's warning that the country needed to remove constraints upon economic growth are pertinent here.

It was encouraging therefore to see Jacob Zuma on the steps of Parliament telling the SABC that he endorsed the budget and that it was sensible, well thought out, and pragmatic. This suggests that the next government may accept that ideological or manifesto commitments play second fiddle to economic realities and that leftist influences in the ANC may be overridden by prudent financial  considerations. Certainly the ANC will not again have the luxury of choosing between growth or redistribution. This is the agenda that has been set by Mr Manuel. It remains to be seen whether the ANC will follow.

This article by Frans Cronje, Deputy CEO of the South African Institute of Race Relations, first appeared in the Institute's weekly newsletter SAIRR Today, February 13 2009