More thoughts on the Budget 2014 Reply

This afternoon the Minister of Finance delivers the 2014/15 Budget in Parliament and it is going to be one of the most challenging Budget speeches of the past 20 years. In our system with a Medium Term Expenditure Framework, this is not a surprise. In last year’s Budget speech and in October’s MTBPS, or mini-budget, the Minister emphasised key points that will be reiterated today:

  • Implementation of the NDP.
  • Reforms to build an efficient state.
  • Reinforcing the fiscal stance.

In this afternoon’s speech the Minister can only tell us what has happened since October and the changes to the plans outlined in the MTEF. A key point is that economic growth has been lower than he had hoped. macro projections We saw yesterday that fourth quarter growth was slightly higher than expected at 3.8%, but the real annual GDP growth rate was 1.9%. This is lower than the 2.1% that the MTBPS projected. Slow economic growth limits the Minister’s tax income, which in turn limits his spending proposals. At best we will watch the Minister treading water, maintaining spending on infrastructure and the social wage, but with limited proposals for additional spending. In fact, he is likely to announce slower rates of increase in spending than set out in the MTEF.

expenditurebegrtingtekort Last year’s Budget and this year’s are in effect austerity budgets. It is all about reinforcing the fiscal stance and the Fiscus is committed to reducing the budget deficit. The aim was a deficit of 4.2% of GDP in 2013/14 and to manage it down to 4.1% in 2014/15 and eventually to 3% in 2016/16. Without high rates of economic growth and a stagnant tax take this means that much slower rates of growth in spending are necessary. The graph shows that over the period 2008/09 to 2011/12 the compensation of employees grew by 8.3%. This is expected to grow by 1.3% through to 2015/16. Transfers to households grew by 5.2% over the period 2008/09 to 2011/12, but will only increase by 3% through to 2015/16. There may be actual spending cuts for some items to free up money to use elsewhere.

3 gapsIn a counter-cyclical Keynesian demand management sense the Minister can do very little to boost economic growth – he is slowly taking his foot off the accelerator! The EFF, for example, would argue that this is the time to do more, not less. Why not finance more spending with debt? South Africa’s debt to GDP ratio is relatively low, so why are we so worried about rating agencies? The fact is that ratings agencies and foreign investors are worried and we cannot afford to ignore those concerns. As an economy we live way beyond domestic means. We invest more than we save, government spends more than than its tax income and we import more than we export. These three deficits  are financed by foreign savings. We are desperately dependent on foreign savings for our economic growth and for developing growth potential.

The Budget speech may not do much for growth this year, but it will help with developing growth potential. The NDP is the best road map that we have and spending on infrastructure and human capital is the way to ensure higher growth rates in the future. But we have to keep in mind that:

  • It is going to take time to see the results.
  • More efficient spending and delivery will be key to the implementation of the NDP.

Unfortunately, efficiency is not something that the Minister of Finance can ensure. He can help make the plans and provide the money, but delivery takes place mainly at provincial and local level, where we face particular governance problems. But that is a topic for a different post.

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