Wednesday, 22 February 2012

Budget 2012: Back to the future

Minister Gordhan delivered the 2012 Budget speech in Parliament this afternoon and news services, blogs and Twitter have been buzzing with comments. So this is me trying to get a word in edgewise. I won't try to provide a summary or list all the highlights, but want to mention a few things that makes this budget different.

Overall, there is little to complain about. It seems that the Budget again provides for increased spending, some tax relief and a stable deficit. All this against the background of global turmoil and edgy bond markets! The Mail and Guardian's first article out after the speech: "Gordhan targets the rich in 2012 budget"  is fun for scaring the rich, but completely overblown. For individuals the Budget proposes very modest tax relief and has some proposals for reducing tax arbitrage. The rich will end up paying a bit more, but in the R1 trillion Budget scheme of things, the amounts are small.

Of greater interest to me is what the Budget could mean for the economy at large. In that sense it is a Budget in two parts: Social and Economic. For the social part education, health and spending on social assistance is sustained and increased slightly. Social spending makes up 58% of government spending, up from 48% ten years ago. Almost a third of the population receives social grants and the social wage for a family of four is estimated to be about R3940 pm in 2012. The social spending was also the predictable part of the Budget and a commitment that the government has made since 1994. It should be seen as an investment in people.

To my mind the economic part is the interesting part. Here the focus is on growth and job creation. The question is, how much can one Budget do?

Directly, the influence is small (and that is the way it should be):
  • In Keynesian demand management terms the deficit (4.6% of GDP) means that government spending is stimulating aggregate demand, which should fuel some growth.
  • Spending that is directly aimed at job creation is quite limited: Community work programme (R6.2 billion), Working for water, Working on fire (R7.7 billion), National Rural Youth Service Corps (R900 million) and Arts and Culture job creation (??) (R300 million).
  • In 2011 the Jobs fund received 2500 applications and R1 billion was committed.
  • The youth employment incentive is still under discussion at NEDLAC.
Indirectly the influence can be significant. Today's spending and taxation proposals target the fundamental drivers of growth: savings and investment, human capital and infrastructure. This is the interesting part. I havn't done any exhaustive analaysis but it feels like the Budgets of the mid-2000's were mainly about macro-stability and social spending. Some infrastructure spending was promised, but growing the economy and creating jobs were left to the private sector. Today's budget smacks of a much more active government plan for the economy. Levers of economic change are identified: infrastructure, industrial development and SEZs, R&D, education and skills development:
  • There are approved and budgeted infrastructure plans of R845 billion over the MTEF: R30 billion in the energy sector, R262 billion in transport and logistics.
  • Funding comes from a mix of taxes, debt, user charges and private investment.
  • With key roles for DBSA, IDC, PICC.
The Minister said “No good project will be short of funding”. In this, the Gauteng toll roads may be indicative of future financing approaches: Some sharing of the burden along with the thin end of the wedge.

Where we go back to the future is the extent to which old-school industrial policy got airtime. I have posted on this earlier and a number of the proposals made this afternoon channel the IPAP-2.
  • Under additional allocations for economic services the DTI gets R5.8 billion for the manufacturing competitiveness enhancement programme, and R2.3 billion for industrial development and special economic zones.
  • Support for the business sector includes: SME finance, a procurement accord, incentives for the automotive, clothing & textiles sectors, SEZ’s, R&D tax incentives and a venture capital incentive.
How sensible this drive for industrial policy is, is the topic of another post. For now the challenge acknowledged by the Minister lies in planning and management to ensure delivery.  In 2010/11 only 68% of planned infrastructure spending took place. Today several measures are proposed to improve project implementation and build management capacity. Unfortunately, there is good reason to be concerned.

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