Budget & Macro-Economic Overview: hearings

Meeting report

FINANCE PORTFOLIO COMMITTEE
18 February 1999
BUDGET & MACRO-ECONOMIC OVERVIEW: HEARINGS

Documents handed out:
SACOB submission
Applied Fiscal Research Centre, UCT: Fiscal Risk Management
Merrill Lynch submission

Here are some of the submissions presented on the 1999/2000 Budget:
Applied Fiscal Research Centre, UCT: Division of Revenue; Memorandum
Applied Fiscal Research Centre, UCT: Social Service Delivery
Black Sash
Centre for Scientic and Industrial Research (CSIR)
FEDUSA
IDASA: Budget Information Service
South African Catholic Bishops' Conference (SACBC)
South African National Council for Child & Family Welfare
Wittenberg, Dept. of Economics (University of Witwatersrand)

SUMMARY
Budget hearings before the Finance Portfolio Committee from invited organisations and businesses. Five experts spoke on the macroeconomic perspective and impact of the budget, and then fielded questions from members of Parliament.

MINUTES
Dr. B. van Rensburg, from SACOB, read a prepared submission. He said that most people in business congratulate the government budget as a stepping stone to build economy and allow economy to grow. Growth targets named in the budget were 0.8% in 1998, 1.8% in 1999, 3.2% in 2000, and 3.8% in 2001. GEAR had set a target for 1999 of 6%, so we know we are slipping. Several problems exist in the current economy:
there is a significant savings investment gap. There was about 20% savings a decade ago, and now it is 13%, so it is declining all the time. Government is dis-saving, or borrowing money to pay recurrent expenditure, at around 4%. It cannot be argued that this spending is for infrastructure.
there is a gap in balance of payment services. This is 3% of GDP and we need to focus on our export side. We have a propensity to import and this is in line with modern liberal trends, and there is no way we can stop this.
The budget will make a difference because of the corporate tax and the reduction in personal tax. It also addresses social delivery and transformation. Ultimately what we all want is jobs for all who want them. This is the goal for all of us and we must not have an inflexible labour market.
Suggestions: emphasise encouraging exports, as this should create mechanisms for marketing South Africa.

Dr. Adelzadeh, from the National Institute of Economic Policy, began by saying that macroeconomic policy performance is all related to GEAR. Despite a market-friendly approach, our economy has declined since 1996 and is still going down. GEAR did not lead to growth of output. It did not lead to an increase in investment in the private sector. It was supposed to have led to a 9% increase but only 1% registered. It did not lead to an inflow of private investment, nor a reduction in government debt, which actually increased. There was also no improved balance of payments position, nor financial stability. GEAR had relied on a response of the private sector. It made unrealistic and unattainable growth targets in exports in a short period. These criticisms are in line with those now being made in Third World countries with similar schemes.
Likewise, the World Bank even says now that moderate inflation is not harmful, and budget deficits are not necessarily bad. There have been overstated benefits of privatisation which avoided discussing costs. South Africa should reflect on its choices, and try to develop a post-GEAR consensus.

Ms. T. Ajam, from the Applied Financial Research Centre at UCT, said that she would focus on how macroeconomic performance would impact on the budget. Without GEAR economic conditions in South Africa would have been even worse, given the international turbulence in the markets. Singapore and Indonesia both fared worse than South Africa. This turbulence must be built into the budget, and government should have a larger contingent liability for fiscal risk.
There were good tax yields this year because of improvements in administration. Debt service shot up.

Mr. J. Laubsher, from SANLAM, gave a perspective from the money market. The biggest surprise in the budget was the corporate tax reduction. It was a very credible budget, mildly expansionary. The bond and equity markets welcomed it.
He would like to see a major privatisation. ESKOM would be an excellent choice.
Government is taking the risk of foreign borrowing too far. It only represents 4% of South Africa’s debt.
He would like to see policy statements from government on foreign borrowing, foreign exchange controls, and inflation targeting.

Mr. Jos Gerson, from Merrill Lynch, said he congratulates government on its credibility and commitment to its own fiscal policy. Six months ago there was a strong fear abroad that South Africa would do a u-turn on its economic policy because of frustrations. We were at the mercy of global developments.
He believes demand will sink further this year. Our emphasis on stability is paying off.
The world situation has been much worse than predicted, especially in Latin America. Problems will get worse when the "bubble economy" in the US begins to falter.

The Chairperson of the Committee, Mr. Mpahlwa (ANC), asked Mr. Laubsher whether market conditions were currently good for foreign borrowing.

Mr. Laubsher said he is not saying now is the right time to approach foreign markets. Should conditions allow for it, the government should investigate borrowing more offshore.

Mr. Andrew (DP), added several comments. He said that GEAR, for the most part, has never been implemented. The aspects of GEAR that have been implemented have done well. The budget deficit, for example, has seen a lot of attention and a lot of success. But the vast majority of GEAR has never been implemented, and so it is probably premature to begin judging the value of the programme.

Mr. Andrew also said that South Africa suffers from very high interest rates locally, and they also suffer from not getting as much foreign direct investment as they would like. As he talks to investors and foreign business people, one comment that gets raised often is South Africa’s foreign exchange contracts. Who wants to invest when the exchange is at R10 to the British pound, if in three years it will be R15 to the pound? He suggested that the way to solve the problem would be to stop protecting the currency – it may devalue a bit but at least then it would settle, and an investor would know that the value of the rand is the value the market has assigned to it.