Government is to spend R738.6 billion this coming financial year (up from a real expenditure of R632 965 billion last year). To do this the state will spend about R90 billion more than it expects to earn in taxes and other revenues.
Of this just R32 billion going to defence, R46.4 billion to policing, R11.3 billion to the justice department, R13.2 billion to prisons, R5.3 billion to Foreign Affairs and R1.6 billion for the state airline.
As usual, the Intelligence budget is hidden, but based on the difference between the defence budget tabled yesterday and the combined defence and intelligence budget in the Medium Term Budget Policy Statement (MTBPS) published in October; it should be about R2.4 billion.
State spending will increase to R792.4 billion next April and R849 billion in April 2011. This is, however, lower than the figures given in the Estimates of National Expenditure (ENE) last year. That put this year`s government budget at R716.243 billion, next years` at R789.325 billion and 2011`s at R856.753 billion.
This year`s ENE note that just 8% of this year`s amount will be spent on servicing state debt. Government spending on infrastructure will total R787-billion over the next three years, R390-billion of which will be capital spending by state-owned enterprises.
The budget also include a contingency reserve of R6 billion this year, R12 billion next year and R20 billion the year after that. “The reserve is a provision to deal with unanticipated events,” the ENE says.
“The reserve also allows government to augment progress made by provinces and municipalities in expanding public employment programmes, extend agricultural support programmes, increase enrolment in further education and training colleges and make policy changes in response to adverse macroeconomic developments and new government policies”.
The document adds that Finance minister Trevor Manuel will spend an additional R158.1 billion “to take forward key priorities over the next three years. Included in this is R56.8 billion to compensate for higher than expected inflation. The bulk of this funding goes towards salary increases and capital project cost escalations, which are both inflation indexed, and to beneficiaries of social grants, to retain the purchasing power of grants.
“Some adjustments have also been made to specific budget items in particular votes, mainly to compensate for food, fuel and medicine inflation. Included is also an allocation of R50 billion, made as a loan to Eskom towards increasing electricity supply capacity in South Africa”.
Manuel has increased the defence budget by R2.1 billion, mostly to pay for the Saab Gripen advanced light fighter aircraft and the Airbus A400M Loadmaster. The police gets R3.8 billion more “mainly for the criminal justice sector modernisation project, which involves the accelerated national rollout of integrated IT systems and databases, as well as improvements in detection and forensic capabilities”.
“To cater for additional policing personnel capacity, especially in the detective and forensic services, R750 million has been allocated”. The Department of Correctional Services receives R900 million more “as a gross total allocation to deal with the personnel cost pressures it currently faces”.
SA approach to crisis
In his address to the National Assembly yesterday afternoon, Manuel said the global economic crisis he had warned and prepared against had arrived, though in greater severity than anticipated.
“Our response to the present crisis is to face the challenges before us boldly, and as a nation united. Our duty is to construct a South African approach, founded on our own
vision for a shared future.
“This approach can only be built on an engagement between social partners, not just at the level of a national dialogue, but on factory floors and in community halls. Our resolve will be tested to its limits. We have to put self-interest aside, we have to face each other honestly and openly.
“Our task is to see through the challenges of economic vulnerability today to the construction of the new South Africa that is our passion and our pride. We can do this all the better as a united people.
“We will not be deaf to the voice of those in pain. We will not be blind to incompetence or greed.”
A second Great Depression?
Manuel noted the global economy is experiencing a sharp downturn, spreading from developed to developing countries. “Its origins lie in macroeconomic imbalances of an unprecedented scale. An accumulation of debt by firms and households in some countries has been matched by an extraordinary rise in export earnings and savings in other regions,” he said.
“Behind these flows are millions of savers and lenders, linked through a financial architecture of such complexity that neither accounting standards nor regulatory oversight have served their intended purposes: prudential banking rules have been overwhelmed by folly and fraud, masquerading as financial innovation.
“This is a cycle that has played itself out periodically – economic historian Karl Polanyi, sixty-five years ago, provided a classic account of how a utopian faith in self-regulation has led repeatedly to exuberances of this kind in the rise and fall of market economies.
“The consequences are felt everywhere. If the balance sheet of a bank shrinks, its capacity to lend is eroded. If its lending is curtailed, businesses and households have
to reduce their spending. If demand falls in Birmingham, factories close in Beijing. If production lines in China slow, demand for commodities from Africa dries up. The vegetable shop next to the mine closes, and the drivers of the delivery vehicles are asked to work short time, on half pay, and if the driver cannot pay his mortgage, the bank forecloses on his bond, and the bank writes down its balance sheet again…”
“In a very short period … what started off as a financial crisis may well become a second great depression.
“Last year, 2.6 million US workers lost their jobs. This year, twenty million migrant workers who went home for the Chinese New Year will not return to the cities, because those jobs have disappeared.
“In the past ten months, the International Monetary Fund has revised its forecast for global growth in 2009 downwards no less than five times, from 3.8 per cent in April last year to its current estimate of just half a per cent.
“Initially the downgrades were focused on developed countries, but projections for GDP growth in emerging markets have now halved from 6.6 per cent in April to 3.3 per cent currently.
“The United States has been in recession since the last quarter of 2007 and its economy is expected to contract by 1.6 per cent in 2009. The official interest rate has been cut to almost zero. Growth in Europe has slowed to 1 per cent in 2008 and is forecast to contract by 2 per cent in 2009. The UK economy is expected to shrink by 2.8 per cent in 2009.
“China`s GDP growth fell to 6.8 per cent in the final quarter of 2008 and will slow this year to its lowest level since 1990. India`s growth will fall by almost half. Sub-Saharan Africa is feeling the effects of the commodity price plunge and declining investor confidence. Projected growth slows to 3.5 per cent in 2009 from 5.4 per cent in 2008.
“In responding to the crisis, immense commitments of funds have been made by the governments of major economies in support of their financial institutions, and central banks have lowered interest rates to historically unprecedented levels. However, low interest rates do not automatically translate into easily available credit. Households remain wary of further debt, and firms that face trading losses are not yet creditworthy.
“In an ironic twist, capital is leaving emerging markets and flowing into reserve currencies such as the US dollar or the euro, seemingly undeterred by the institutional origins of the financial collapse. Countries such as Brazil, India and Russia cannot raise debt except at premium interest rates. South Africa`s cost of borrowing on international capital markets also increased sharply late last year and remains high.”
Manuel`s budget parameters
Manuel said in framing government`s budget, this year therefore, the Treasury was guided by five enduring principles:
· protecting the poor;
· sustaining employment growth and expanding training opportunities;
· building economic capacity and promoting investment;
· addressing the barriers to competitiveness that limit an equitable sharing of opportunities; and,
· in doing these things we must maintain a sustainable debt level so that our actions today do not constrain our development tomorrow.
Manuel says income and output slowed sharply in the second half of last year, bringing growth for 2008 to about 3.1 per cent. “With commodity prices generating lower export earnings, weak consumer spending and slowing private sector investment, growth in 2009 is forecast to be 1.2 per cent, the lowest rate since 1998.
“We expect output growth to improve in 2010, supported by public infrastructure spending, lower interest rates, the 2010 FIFA World Cup and a recovery in the world economy. But trading conditions are tough and are likely to deteriorate further in the short term.
“The central goals of economic policy remain accelerating growth and job creation, broadening economic participation and reducing poverty. Progress in these areas will be more difficult over the period ahead. Policy adjustments need to reinforce macroeconomic stability in the context of a deteriorating international environment and provide a temporary cushion to the domestic economy. Lower inflation in the months ahead should contribute to moderating interest rates,” Manuel told the nation.
“The largest adjustments to spending plans go to poverty reduction: R25 billion is added to the budgets of provinces, mainly for education and health care, and R13 billion for social assistance grants and their administration. R4 billion is added to the school nutrition programme and R2.5 billion goes to municipalities for basic services.
“… the quantum of the rands and cents allocated to these programmes is not what provides relief. No, we can only be satisfied when we know that the quality of life of the poor is improving, that children are being properly educated, that learners have access to food in schools, that mothers visiting clinics get proper and dignified treatment, that the criminal justice system is putting those who rob and thieve behind bars. It`s what the money buys that matters, and so fixations with the size of deficits or surpluses are illusory detours.
“Secondly, greater effort is needed to accelerate employment growth. Government will work with business and organised labour to protect work opportunities and accelerate skills development over the period ahead. Additional funding over the medium term will go to the Working for Water and Working on Fire programmes, and R1 billion goes to the Umsobomvu Youth Fund. R3.7 billion is added for low-income housing projects and R4.1 billion is set aside for the second phase of the expanded public works programme.
“Building our capacity to grow is the third thrust of our spending plans. It is reflected in government`s R787 billion infrastructure investment plans and is a cornerstone of our development contract with business, organised labour and other social partners. In this budget a further R6.4 billion is added for public transport, roads and rail networks, R4.1 billion for school buildings, clinics and other provincial infrastructure projects, and R5.3 billion for municipal infrastructure and bulk water systems.
“Major investments in power generation, transport networks and telecommunications are in progress, building an environment within which mining and industrial development, tourism and our services economy will prosper, even if the short term outlook is poor.
“Fourthly, a time of restructuring is an opportunity to address regulatory and microeconomic barriers to our competitiveness. This involves detailed sectoral analysis, and ongoing consultation with affected industries and interest groups – it is the key to sustained, faster, long-term growth. In this budget, R1.6 billion is added to industrial development and small enterprise support programmes, and R1.8 billion goes to rural development and small farmer support. A further R1 billion is added for electricity demand management, together with tax incentives for investment in energy-efficient technologies. The new automotive production and development programme includes a production subsidy, which receives R870 million over the next three years. Additional funding also goes to consumer protection, the competition authorities and enhanced testing capacity of the SA Bureau of Standards.
“The fifth principle is the sustainability of the public finances. In the present global uncertainty, our task is to respond to the economic downturn without putting our long term financial position at risk. Although the budget deficit will rise to 3.8% of
GDP next year, debt service costs will remain moderate over the next three years, at
about 2.5% of GDP.
“This is possible because we have had the courage to make the right choices, over the past decade.”
Manuel says budgeting is not just about allocating spending, it is “also about rooting out waste, promoting cost-efficiency and phasing out ineffective programmes.
“Departments have again been asked to identify savings, and cuts amounting to R19 billion were affected in the final stages of preparing the 2009 Budget.
“In the period ahead, it will be necessary to take stronger action in pursuit of efficiency and better targeted expenditure. There is insufficient control of foreign travel, advertising and public relations activities and consultancy services. Stricter oversight of the activities and executive remuneration in agencies and government enterprises is also required.
“I believe that Parliament and our committees should play a more active role in challenging accounting officers to plan their efficiency saving initiatives up front, and report regularly on progress. A greater sense of responsibility needs to permeate the ethos of government all the way through the accountability chain.”