Manuel, the juggler

2008-02-18 00:00

This year’s budget, due to be unveiled this week, has more uncertainty surrounding it than in many previous years. The main reason for this is the electricity crisis and the possibility of government support for Eskom.

But another reason for uncertainty is the fact that Finance Minister Trevor Manuel’s tenure might be drawing to a close and he might have an eye on the legacy he leaves.

President Thabo Mbeki was vague in his speech in Parliament on what help the government would provide Eskom. The utility has made it clear that it needs a cash injection. The message is that, without a cash injection, consumers will face horrific increases in electricity tariffs.

A key point here is that horrendous increases in electricity tariffs will give an inflationary shock to the economy, which has implications for interest rates and economic growth. A strong case can be made in favour of providing Eskom with a sizeable capital injection.

Manuel can’t argue that he doesn’t have the money. He has pencilled in a budget surplus of R16 billion (0,7% of gross domestic product) for the 2008/09 year.

In last year’s budget review, he pencilled in net new borrowing of less than R2 billion for 2008/09.

If Manuel follows the last spending plans he communicated to the market, the government will be able to keep going for two fiscal years without any new borrowing. The reason is that Manuel has a massive cash pile in the government’s bank, built up over years of huge revenue overruns and concurrent borrowing on the capital market. Manuel may have to give most of the R16` billion surplus to Eskom — at least R10 billion. Anything less won’t make a difference, given the utility’s spending needs of R300 billion over the next five fiscal years. The trouble with giving the surplus away to Eskom is that it leaves Manuel with very little room to manoeuvre on anything else.

Given the government’s past reluctance to provide Eskom with capital, it would be safe to assume that Manuel doesn’t want Eskom to gobble up the whole of the surplus. The way to avoid this is to help Eskom by guaranteeing its debt instead of giving it cash.

What this will mean for electricity consumers is that Eskom will finance more of its spending through debt, which implies interest payments. The interest costs, in turn, are passed on to consumers in the form of tariff increases. So, if Manuel goes the guarantee route, he will choose to leave as a legacy to South African electricity tariff increases that are too ghastly to contemplate.

It’s true that South Africa’s electricity is priced ridiculously low and that increases have been long overdue. But the way in which the situation has been handled looks set to provide a shock to the system. This is a bad idea.

I’m in favour of the government providing Eskom with a capital injection. Manuel’s room for manoeuvre would be a little bigger if he moved away from the idea of running a surplus towards running a deficit. The trouble with that, however, is that the government that takes over after next year’s general election is likely to be more left-leaning than this one. The new government — which may or may not be led by Jacob Zuma — is highly likely to be a deficit spender.

So, if the new government starts off in the red, it may not be long before South Africa is back to where it started — the fiscal debt trap.

Manuel may want to to be remembered as the government minister who got South Africa out of the debt trap and kept it far away from that point before the new guys stepped in.

However, the flip side of that extreme prudence is that he may not be remembered for what he did for the poor. Something will have to be done. Mbeki already addressed this issue in his State of the Nation address when he said that men aged 60, and not 65 as is currently the case, would qualify for state pensions from the next fiscal year.

One hopes that Manuel will also be able to give increases in social welfare payments to individuals that reflect the reality of the inflation rates experienced by the poor. Statistics SA figures show that consumer inflation for very low expenditure groups was 12% last year. Any increase in state welfare payments below this level will be an insult to the poor.

In an ideal world, Manuel will also want to show he is pro-business by cutting the corporate tax rate. Mbeki announced money (R2,3 billion) for industrial policy initiatives and a further R5 billion over three years for investment incentives. It’s well known that the Treasury isn’t a great fan of industrial policy, but from Mbeki’s speech it looks as if Manuel lost that particular battle.

Every year, some hack uses the cliché of the minister having to juggle many balls or walking a tightrope. But never have these clichés been more true than for the coming fiscal year. — Fin24.

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