No surprises for budget

Global economic growth prospects have deteriorated, with South Africa expected to average a growth rate of 3% in 2008, compared to the average of 5% experienced over the previous four years. The impact of this slower growth and global financial crisis is expected to play an important roll in the prioritisation of government expenditure going forward: the Minister of Finance, Mr Trevor Manuel, is expected to be conservative in structuring the budget for the upcoming budget year 2009/10, aiming to find the correct balance between long term growth and short term social upliftment. Mr Manuel’s track record shows that he has a history of having a predictable approach with clear objectives, orientated towards the long term growth and stability of the South African economy.

Will expenditure on social services be a priority?

As has been the trend in the past; both infrastructure and social upliftment have been priority areas, but difficult economic conditions and the impending general elections will mean that the Minister will be confronted by a delicate balancing act. In line with current political objectives KPMG expects social expenditure to receive even more emphasis in the 2009/10 budget. The ANC election manifesto prioritises health, education, rural development and agricultural reform, sustainable employment creation (including addressing underemployment) as well as a reduction in crime and corruption. In particular, KPMG anticipates a shift away from increased infrastructure spending, towards increased spending on social infrastructure. Although mention has been made of both social health insurance and a basic income grant (BIG), it is unlikely that these services would come online within this budget period.

Is infrastructure investment set to continue?

Eskom received additional funding for their capital expansion project during the 2008/09 budget year, after the January 2008 electricity crisis. With the demand for electricity having declined, due to slower economic growth, it is not expected that Eskom will receive extra funding in the 2009/10 budget. The slower growth in demand might also put them in the position to roll out planned infrastructure expenditure over a longer period of time. Eskom has indicated that they may make sizable increases to tariffs, as falling demand reduces revenue, which is required to help finance capacity expansion projects. Restricted access to liquidity is also likely to put strain on the ability to get adequate funding for planned investment projects.

Infrastructure expenditure is not expected to increase significantly as R11 billion was allocated to the public transport infrastructure systems in the previous budget for improvements in infrastructure over the next 3 years, which includes investment expenditure on upgrading infrastructure in order to successfully host the 2010 FIFA Soccer World Cup.

Financing the expenditure - taxes

A tax collection overrun of R1.2 billion has been forecasted by the medium-term expenditure framework. Increased tax collections in the past were due to a combination of improved collection efficiency, increases in the tax base and strong economic growth. However, due to slower economic growth in 2008 and the efficiency improvements reaching close to their optimum benefit, the expected over–collection is expected to be significantly less than in previous years. The figure below shows the difference in the actual amount of tax that was collected during the budget year compared to the estimated amount of tax that is budgeted for over the period 2000 - 2008.

It is unlikely that there will be any material reductions in personal income tax. Tax brackets for lower income groups are expected to be adjusted upwards to compensate for inflationary changes. No major changes are expected with regard to company tax. Revenue from companies are also expected to be lower than anticipated, as decreasing company profits will result in lower revenue collection. It is nevertheless expected that the policy trend of aligning company and personal tax will remain. Sin taxes and the fuel levy are expected to increase, as has been the trend in the past.

Government has committed themselves to the relaxation of exchange control measures. Expectations are that they will continue the historical trend, but lessons learned during the past couple of months might result in them approaching this with caution, with only minimal changes being made, as global financial market instability persists.

Conclusion

To achieve sustainable economic growth and development and aid in poverty reduction the budget needs to be allocated to areas that will encourage long term growth, without compromising on short term upliftment of the poor and the provision of basic services. Much of the recent economic growth has been underpinned by investment in infrastructure projects both in preparation for the 2010 Soccer World Cup and more importantly in line with achieving AsgiSA targets^*1 for economic growth and poverty alleviation by 2014. Continued investment expenditure on hard infrastructure, such as electricity, water and sanitation are expected to continue in line with the growth in demand although the timing of such expenditure may be deferred to more opportune times. Consumption expenditure has been one of the main drivers of economic growth in the past. The current economic crisis has meant that consumer spending has decreased and therefore economic growth has been primarily dependent on infrastructure expenditure. The question remains which fiscal mechanisms will be used to support both supply and demand to ensure more balanced future growth.

^*1 The AsgiSA programme sets out objectives for South Africa’s economic growth and development. The target GDP growth rate is an average of 4.5% over the 2005 – 2009 period, and 6% average growth between 2010 – 2014. In addition, in line with the Millennium Development Goals, the Government aims to reduce unemployment and poverty by halve by 2014.