Budget 2009: Views from SIM Economist, Arthur Kamp & Chris Hamman

Arthur Kamp, Economist, Sanlam Investment Management comments on the 2009 Budget:

Trevor Manuel’s 2009/10 Budget uses the space he has created since taking over the responsibility of fiscal policy to put in place a crisis budget that does the necessary expansionary job in the current global and economic environment, says Sanlam Investment Management economist Arthur Kamp.

Kamp says government debt will increase from the higher budgeted expenditure this year but will remain at a relatively low level. “It is also projected to stabilize once the economy picks up steam again, with Treasury forecasts of future growth not out of line with the general consensus private sector view.”

He notes that the current balance is likely to turn negative and this is usually a fair indication of the direction of general government savings levels. He adds that if the current account deficit narrows this year as expected by the Treasury, this implies a marked improvement in private sector savings with private sector demand very weak.

“We are experiencing a strong unanticipated downturn and this is when fiscal policy can step into the breach. Manual has done just that by being bold and overseeing a material increase in both current and non-current expenditure. The spending has been carefully thought through and is specific and targeted.” His focus has been on poverty alleviation – offering relief to the poor and middle class – and infrastructure spending. This is more productive spending and differs to the offshore experience where many developed countries are bailing out defunct businesses.

“The jump in spending is significant when compared with the Medium-Term Budget Framework,” says Kamp. “This shows just how rampantly conditions have deteriorated.”

It is also important to note that this is a temporary step into the breach, he says, and next year Treasury is looking for a significant recovery in revenue growth. This year, however, revenue is likely to slow sharply especially given that companies have become an increasingly important component of tax collections and their profits are likely to be heavily squeezed.

Kamp says in the budget there was also recognition for the need to support employment and microeconomic competitiveness of industries through the industrial and rural development, small farmer support and more energy efficient policies. “These were small in magnitude but steps in the right direction.”

On the increase in budget deficit to 3.8 percent budgeted for this fiscal year, Kamp comments: “This is a temporary situation. When conditions normalize again, government can bring down the deficit to more manageable levels.”

Chris Hamman, Fixed Interest Strategist, Sanlam Investment Management comments on the 2009 Budget:

“Mr. Manuel started his reign as finance minister under trying economic conditions. There are indications he might end his term as finance minister under equally difficult domestic economic conditions, with the economy expected to grow by only 1.2 percent in 2009. As a result, Mr. Manual was not able to give much tax relief. At the same time, government continues to aggressively roll out infrastructure projects and this spending will contribute meaningfully to the 3.8 percent budget deficit expected in 2009/10. On a consolidated general government level, the deficit is expected to be as high as 7.5 percent of GDP. Importantly, this means that government is now starting to crowd out private sector borrowers from the long term capital market. In 2009/10 interest payable on existing government debt will be R7bn less than expected net long term issuance and this will put pressure on the domestic bond market,” Hamman says.

“Current government spending is expected to increase substantially, with a R12bn increase in social grants. While this will support household spending in the short term, it will add to government dissaving. Over time, this means that the household sector will have to save more in order to finance investment spending, especially in an environment where foreign savings might not be as forthcoming as has been the case during the past five years,” he says.

In all, it is a budget that confronts the current economic reality but also one that will stretch government’s resources as far as the implementation thereof is concerned. Over the next three years, the role of government will be bigger than it has been under Mr. Manuel’s watch, but compared to the interventionist policies recently seen elsewhere in the world, the direct involvement of the South African government in the economy remains comparatively small,” says Hamman.