February 20, 2004

SOUTH AFRICA: Finance Minister presents new budget ahead of April 14 elections

Finance Minister Trevor Manuel has presented the Budget for 2004/05 which, over the next three years, plans to spend 6.0 billion rand on black economic empowerment (BEE) initiatives, as well as an additional 3.2 billion rand to provinces and municipalities for the Expanded Public Works Programme and infrastructure development. Importantly, another 2.1 billion rand has been allocated for HIV/AIDS treatment programmes, on top of the significant amounts already announced in November's Medium-Term Budget Policy Statement and the 2003 Budget. In addition, government will spend 19.7 billion rand for social grants, schools, hospitals and clinic services, 1.9 billion rand more for police personnel, vehicles and IT infrastructure, 1.1 billion rand on defence for peacekeeping operations in Burundi and the Democratic Republic of the Congo for the next three years.

Other changes over the next three years are 910 million rand more for the restructuring of universities and technikons, 700 million rand more for land reform and 750 million rand for a new farmer support programme. 475 million rand are planned to improve the efficiency of the courts and to cater for vulnerable groups, including women and children, and 850 million rand more for Home Affairs to improve services to citizens, especially in rural areas.

The government has also proposed personal income tax relief to the amount of 4.0 billion rand, mainly involving upward adjustments to income threshold levels to compensate for inflation. This is lower than the 13.3 billion rand in relief granted last year, due to shortfalls in revenue due mostly to lower corporate tax receipts.

Government's budget deficit for 2004-05 is moreover set to rise to 3.1% of GDP from 2.6% in 2003-04. This is then due to fall to 2.9% in 2005-06 and 2.8% in 2006-07. Total government debt at March 2004 was estimated at 450 billion rand, or 36.8% of GDP. (The Sunday Times, Johannesburg)
Comment: The South African budget this week was a further indication of a swing away from the strict neo-liberal guidelines embodied in its Gear (Growth, Employment and Redistribution) policy and together with other political indications may show a shift in the balance of forces in cabinet.

The trade unions welcomed it strongly. Cosatu called it "very positive" and said there was "a welcome 9% increase in the overall budget, which will have a positive impact on the social services - especially social grants - and infrastructure, while expenditure on defence remains restrained".

The budget announcement was accompanied by a rhetorical flourish from President Thabo Mbeki who has increasingly taken on the mantle of a re-born socialist. He inveighed against opposition parties for allegedly following a 'free market' line and for proposing that "the democratic state abandons its developmental role".

The "developmental state" phrase comes form the lexicon of the Left, but analysts question whether Mbeki will hold to this rhetoric beyond the April 14 general election. However, there have been some changes of substance in the real economy, both in SA and worldwide, and this may mean the swing towards the state and away from elements of the Washington Consensus may become more permanent.

In SA none of the goals of the Gear macro economic plan have been even nearly achieved, neither in growth, employment nor redistribution. Export-led growth has been stagnant and the earlier eagerness to drop tariff barriers has been replaced with a more measured approach, as evidenced at the Cancun World Trade Organisation talks. The economy is now expected to grow by 2.9 percent during 2004 and a further 3.6 percent and 4 percent in the two years thereafter, Manuel said. This more or less equates with population growth, while the trade unions say that poverty continues to grow.

Mbeki began adopting Keynesian language last year but the novel development this week was Manuel's remark to members of parliament that a major rethink was in progress on the government's privatisation programme. He ascribed this to lessons learned from the disastrous consequences last year of the privatisation of power utilities in California, and not to a shift in the government's macro economic philosophy, but he admitted there was "a big rethink about this issue around the world".

Other economists have noted in just two instances the post-mortem on the IMF-fostered Russian rush to privatisation in the early '90s as well as, more recently, the continuing debacle of the privatisation of British Rail in the late '90s.

In Africa privatisation has mostly led not to the development of an indigenous bourgeoisie, as the IMF and the World Bank prophesied, but to the breaking up and sale of assets, or their takeover by foreign, sometimes South African, capital. At the same time it has staunched the flow of public funds to the parastatals, but this has mostly not led to other productive investment.

Privatisation has been a disappointment for the Gear enthusiasts in government; selling off the main parastatals, and especially the Telkom crown jewels, was to be the route to increased foreign direct investment, also stagnant. But now, according to Manuel, the aim for Telkom will be to unblock communications to allow for easier economic development, a much more traditional role for state utilities.

As a consequence of the failure to secure strong inward investment through privatizations, the state is prepared to borrow more heavily. Again, this approach had been defended by the Left as necessary for boosting SA's economy and developing a domestic consumer market, harking back to the Keynesian 'Merg' report commissioned and then ditched by the African National Congress just before coming to power in 1994. (SouthScan)

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