While delivering the 2007 Budget Speech on 21 February 2007, the elated and charismatic Trevor Manuel’s tone typified South Africa’s economy that has been performing remarkably well over the past 4 years largely due to sound fiscal and monetary policies and global influences.
The increased quantity and quality of spending in the Budget is fuelled by the rationale of summarily accelerating the investment rate and pace of growth; improving the lives of marginalised South Africans; maintaining a progressive security net; combating crime and improving the capacity and effectiveness of state; show case the country through preparing for the 2010 soccer event; and encouraging the culture of saving.
The Budget and its continued expansionary fiscal stance is however characterised by significant challenges that may impede on progress in achieving certain objectives.
These include vis-a-vis policy lags, lack of capacity with regard to spending, government red-tape and inefficiencies, adverse rent-seeking behaviour, income and wealth redistribution. Global influences that will pose challenges include the anticipated lower global growth due to suppressed US growth, risks e.
g. oil prices; US current account deficit amidst large surpluses amongst oil-producing countries. The main monetary challenge is that the South African Reserve Bank seeks to suppress demand to match supply but this is the low growth option.
The proposed long term solution and high growth option is to boost supply in order to meet demand with official and private sector initiatives. A number of items were missing from the 2007 Budget Speech such as the implementation blueprint, a furtherance to motivate a savings culture, privatisation efforts, and limited impact on supply side.
The trade-off between supporting employment growth and containing inflation has slanted toward the latter. It must however be pointed out that utilising the interest rate to curb domestic expenditure may prove more difficult due to recent global influences.
The 2007 Budget is largely accepted as fair and balanced judged on the merits of the criterion alluded to above, however it is suggested that the government look into the feasibility of the following fiscal suggestions vis-a-vis to overcome identified shortcomings: Lower the overall tax burden to 25% of GDP, punish consumption through lowering income taxes but design the shift so that it transforms into savings, shift a greater portion of income into pension provision through tax incentives.
The following monetary measures are suggested:
The following supply-side measures are suggested: Investment in the form of capital formation through government and public corporation; infrastructure creation and skills & productivity improvements at different spheres of the economy; measures to reduce business start-up and compliance costs should be considered; facilitation of private partnerships for a speedy capital formation process; and the treasury should consider revamping its tax regime to make it even easier to comply with.