Mini-budget’s tightrope

2011-10-15 12:22

The next big event in South Africa’s policy cycle is the Medium Term Budgetary Policy Statement – the so-called “mini-budget” – on October 25.

The mini-budget is a “rolling plan” which outlines the Treasury’s view of the economic outlook, government spending and public finances over the next three years and is an essential backdrop to the main budget in February each year.

It therefore represents a major statement on fiscal policy and outlook, which is always important for business confidence.

Given the uncertain global economic outlook, the mini-budget this year will need to address what South Africa can do to cushion and adapt to the negative impact of the actual and potential trends here and abroad.

Although we should be encouraged by the recent, more positive trends – such as in manufacturing output, the purchasing managers’ index and civil construction – the fact remains that overall household spending remains weak, business and consumer confidence are at low levels and private fixed investment is slow.

There is not yet overwhelming evidence of a strong and sustainable recovery in economic activity.

This does not augur well for large-scale employment creation and South Africa will have to revisit some of the measures it took on the jobs front in response to the global crisis.

Our resources and strategic focus must therefore remain concentrated on strengthening the domestic economy. We must avoid a “low-growth trap”.

But what about the forthcoming mini-budget? It comes at a difficult time this year, when markets remain nervous over government budgets worldwide.

The key factor is therefore credibility. There need to be credible forecasts in the mini-budget for the economic outlook as well as a continued, clear path to fiscal health.

A balance has to be kept between a necessary counter-cyclical fiscal stance on the one hand and fiscal prudence on the other.

The debt to gross domestic product (GDP) ratio needs to stabilise under 45% of GDP during this mini-budget period and then decline in the second half of the decade.

Ideally, this should not be at the expense of capital spending but rather as a result of better control over current expenditure, including the state’s wage bill.

This will need to be a tough but essential message in the mini-budget, given the weak global and domestic economic climate, but is necessary for predictability and sustainability in the fiscal outlook.

South Africa’s excellent reputation to date for fiscal discipline will stand it in good stead in this challenging period.
On monetary policy, it implies that interest rates will need to stay low for longer, probably well into next year, and a further cut in the repo rate may become necessary soon.

If our inflation is seen as mostly target-bound and driven by exogenous factors, and taken together with slow global growth as well as South Africa’s sub-optimal growth and employment performance, there could be a case for another interest-rate cut towards the end of the year.

One of the biggest risks in the present economic outlook is the psychological one – the danger of self-fulfilling prophecies.

While a robust debate and analysis needs to occur about the new global and domestic economic realities, a failure to retain perspective can result in precipitating what we most fear?– a “worst case scenario”.

This is another reason for a country like ours to be seen as demonstrating leadership in tackling the old and new challenges facing the economy, building on our strengths and addressing our vulnerabilities expeditiously and collectively.

The more things go wrong abroad, the more we need to look to the efficacy of its domestic policies. Business must rally behind sensible policies that promote growth and enterprise.

Indeed, alongside the goal of five?million jobs to be created over the next decade should be a target of a?million new enterprises to make it happen.

The fact that South Africa is engaged in the new growth path process at present also helps to define current and future responses to the latest global economic crisis.

Given the global outlook, which is likely to take several years to unwind, it remains essential for an emerging market like ours to be able to devise flexible and sensible responses to address the cyclical and structural challenges that exist.

For the moment, though, we must assume that policymakers abroad will do enough to avoid a catastrophe.

If we want to stem current job losses as well as lay foundations for future job creation, we must concentrate largely on the factors which can make a difference locally, rather than agitate excessively about overseas developments over which we have little influence.

The mini-budget should therefore reinforce this message.

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