Manuel plays ball and ups social spending

Finance minister, Trevor Manuel, presented the Medium-Term Budget Policy Statement (MTBPS) in the National Assembly on Tuesday, 30 October 2007. As expected his focus remains on social matters, including poverty relief, service delivery, education and healthcare. Each of these areas will receive more cash in coming years.

It is difficult to level criticism at Manuel. During his tenure as head of the finance department, South Africa's budgeting and revenue collection processes have improved in leaps and bounds. In fact, Manuel has been able to announce a budget surplus of around 0.6% of GDP for each of the next three years.

Ironically it is this success that is viewed by his detractors as one of his failings. His opponents want Manuel to spend more money on addressing poverty and other social imbalances. They argue that a developing country like South Africa should not be running a budget surplus at all.

Focussed expenditure to continue

This concern aside it cannot be argued that government is not spending money. Manuel continues with a sensible approach to expenditure in the latest MTBPS. He allocates slightly more cash to a number of areas with a focus on underpinning economic growth. Items like job creation and education feature high on the agenda as do other social development programmes like household services, public transport, health care and crime prevention. This year's budget allocates R46.1 billion for transport and communication, R47 billion for housing and community development, R106.4 billion on education, R63.1 billion for health and R89 billion for welfare and social development. Each of these areas will receive higher than inflation injections in each of the following three budget periods.

If government's budgeted expenditure continues to grow at current rates a mere five years will pass before we have our first R 1 trillion budget. Manuel revised the 2007/2008 budget to R640.8 billion. This will rise to R747 billion in the 2009/10 year and R820.1 billion in 2010/11.

We suppose the question that remains is why the country's health, education and social development departments continue to under perform. It seems that more than enough funding is allocated to each department and that the voting public should expect better things in these areas after the first decade of democracy.

Collections likely to exceed expectation again

The good news for Manuel (and bad news for taxpayers) is that tax revenue collection is still on the rise. Manuel has already revised the budgeted R556.6 billion expected income to R566.1 billion for the 2007/2008 year. Tax revenue from SARS will increase to R632.4 billion in the 2008/09 year, to R699.3 billion in the 2009/10 year and to R764 billion in 2010/11.

The only stumbling block to continued increased tax revenue collection is in the form of economic growth, which is showing signs of flagging. SARS will come under increasing pressure to collect more money from the country's taxpayers through expanding the tax net alone. Besides at some point SARS should cover the majority of citizens who are required to pay tax.

South Africa has enjoyed a fantastic four years. GPD growth has averaged close to 5% per annum. At the same time, per capita income is on the rise having grown 22% since 1999. And it is estimated the economy has benefited from more than 1.3 million new jobs since 2003. Manuel believes "These are substantial steps towards our medium-term economic goals growth of six percent a year or more, an unemployment rate of below 14 percent by 2014, and an aggregate poverty rate half that recorded in 2004."

Growth under pressure

Inflation is one of the major stumbling blocks to continued robust GDP growth. Since 2006, the Reserve Bank has hit local consumers and businesses with consecutive rate hikes totalling 3.5%. There are growing concerns that the magnitude of interest rate hikes might severely slow the economy. Manuel is aware of the situation and has slightly moderated the GDP growth expectations for the next two years.

Another cause for concern is the widening current account deficit. South Africa already has one of the largest (percentage wise) current account deficits in the world. Currently at 6.7%, Manuel expects the deficit to widen to as much as 7.8% in 2010. Hopefully he has long-term plans to bring the deficit to a more acceptable level.

In closing, it is easy to steer a country's finances when the economy is on song. Manuel has been able to rely on GDP growth to support governments ambitious expenditure over the last four years. With growth still above 4% per annum, he might not face a serious test in the next few years. We will hopefully have to wait a long time before we discover what happens when things cool down?

Editor's thoughts:
Manuel continues to allocate huge resources to health care and education. It makes us wonder why these departments are in such a poor state today. Although matric pass rates have improved slightly over the last decade, the gains have come at the expense of standards rather than as a result of a better education system. And government hospitals are in a sorry state. Does government need to hold the heads of these departments accountable for continued poor performance? Send your comments to [email protected]