Inconvenient truths

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By Cees Bruggemans

There are some inconvenient truths playing out.

There is the recession which is apparently still masquerading as a growth slowdown, but should eventually be acknowledged for what it really is, even if this isn’t quite convenient going into a general election.

Then there are the infrastructure cost escalations. These are an embarrassment at the best of times, and a real pain if it throws doubt on the ability to sustain the infrastructure rollout.

A few years ago it was supposedly a lack of skills that would derail the greater infrastructure effort. That problem quietly disappeared as our construction industry proved capable of handling the workload.

But this past year capex costs started to escalate rather alarmingly, mostly due to global conditions and weak Rand, with foreign capital access also less certain.

The public infrastructure spending will rise by 50% from R130bn in 2008 to R190bn in 2009. For the next three years (2010-2012) a further R800bn is budgeted. These numbers have jumped considerably, not because of more infrastructure being planned (indeed some things are being scaled back or delayed, thinking locomotives for instance) as due to considerable cost escalations. But as has been shown our public finances can probably handle the challenge.

The budget brought its own set of inconvenient truths.

For the past financial year, the Finance Minister reported under-recovery relative to budget of some R14bn of tax revenues, causing much of the earlier budget surplus of 1% of GDP to evaporate.

But was there also reason to slip in an extra R29bn of unbudgeted spending (R26bn when excluding higher interest), pushing the budget to a 1% of GDP deficit?

Transfer and subsidies were the largest cost overrun, coming in R22bn higher than budgeted.

The year before (2007), the Minister’s spending overshot by only R10bn. This past year (2008) it was R26bn, but that’s like nothing what is still coming this year (2009) and next (2010).

Global emergencies can certainly create local emergencies, inviting action to do something productive, such as allowing budget stances to widen in order to accommodate the falloff in revenue on account of weaker growth. And even to top up public spending to prevent the economy to fall too far below its growth potential.

But where does this commonsense idea end and the political calculations of an election year and the demands of a new incoming dispensation start to shine through?

Worsening economic circumstances certainly help greatly to get things approved, and no longer make them much of an issue.

Still, one is aware of political changes and the vocal demands for more social spending. These political pressures have been mounting for some time, and must have become unbearable as budget time approached.

One theme of the budget was that in harsh times such as the present one has to look after the poor. This was certainly done, with for instance an additional one million people given social grants, taking total grant recipients to 13.3 million.

This budget was clearly crafted around a global emergency also likely hitting South Africa hard this year. Thus there is unquestioned willingness to take the budget into deficit as tax revenues fall away.

But it was more than only tax revenues. The 2009 tax revenues will undershoot the baseline budget by R50bn and this will be compensated for by a widening deficit and more borrowing.

But there is also an additional R63bn in spending in 2009 (90% of it transfers and subsidies) and another R56bn in 2010. Even when excluding extra interest, it adds up to R130bn more spending than budgeted in a mere three years. That’s even more than the cumulative R115bn tax shortfall over this period!

Isn’t that remarkably in line with political needs in a crucial election year rather than only reflecting the social needs of a weakening economy?

True, lower interest rates will favour the indebted, which generally have higher incomes. The weaker Rand favours producers. Lower oil prices favours many urbanites. So who speaks for the poor?

Thus was the budget surplus of 1% of GDP in 2007 translated into a deficit of 4% of GDP in 2009.

But was it really necessary to make those scary growth assumptions as well? Or did it help in selling the overall message?

Not so much the 1.2% GDP growth for 2009, which was raw realism, even if many private forecasts are already somewhat lower by now.

But the estimated 1.4% decline in export volumes looked rather still too optimistic, if the global shock is really as dire as claimed, and central to the budget’s foundations (with such expressed realism certainly not to be decried).

Also, wasn’t the assumed shrinkage in imports a bit big relative to the export shrinkage? I know we are belt tightening locally, implying less imports, but our infrastructure effort isn’t and foreigners are certainly doing a lot more belt tightening than we are.

But these numbers helped to show a contained current account deficit, with both data sets perhaps coming across as less alarming to foreign credit suppliers and those trading, making and breaking currencies.

But if that is what you want to show externally, exceptional weakness has to be shown domestically in order to still show that very realistic 1.2% GDP growth scenario for 2009.

But was it really necessary to show households doing as little as -0.2%, and total domestic demand +0.2%? I know durable consumption will be down, but nothing suggests non-durables and services (75% of the total) will be, at least not to any alarming extent going by company trends.

And certainly not after all the support given for lower incomes by this budget, or for indebted households by the SARB in terms of still lower interest rates.

But such a dire household and domestic demand forecast does make it far more acceptable, indeed even unquestionable, to show more compassion for the poor, generously expand the ranks of grant recipients and spend so much more on so many deserving delivery Ministers (many of which in the Budget speech were actually begged to do something useful with the money for a change – a refreshing insistence on quality in municipalities, education, policing, land reform – it was a long list).

Yet how to explain that VAT collections will go up by 9% this year, while inflation is projected at 5.8%? Even with some more tax collection efficiency (bravo, SARS), the gap surely isn’t entirely explained away?

Could there be more domestic growth than fully allowed, and much more of an external export hit than shown?

Ultimately, none of this is important. The infrastructure show must go on. The evolving political scene demands its grease. And the global hit to the economy is real enough.

All these budget actions make everything so much more bearable, including the willingness to fully adjust income tax tables for inflation-induced bracket creep these past two years (with no real ‘relief’ at all, though many keep dreaming such tax relief exists).

Bravo, a good budget in which many things got done without a whimper and much applause from all sides was won, given to few Ministers of Finance in trying times. And these are very trying indeed, economically, financially but especially politically.

Source: Cees Bruggemans, FNB, February 16, 2009

 

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