Posted: 2008-02-20 23:57 Budget 2008 - economic implications  Presenter: Erika van der Merwe Guest(s): Marcus, Mercier, Lings - Click here to listen to the interview Summit TV takes a look at the economic impact of Trevor Manuel’s 2008 Budget with Ridle Marcus from Absa, Jean-Francois Mercier from Citibank and Kevin Lings from Stanlib ERIKA VAN DER MERWE: Welcome to the Summit TV special Budget broadcast. What is the economic impact of Trevor Manuel’s 2008 Budget speech? In the studio is economist Jean-François Mercier from Citibank, Ridle Marcus of Absa and Kevin Lings from Stanlib. Kevin, is this the best Budget ever? We’ve had lots of hullabaloo and fuss about how wonderful this Budget is… KEVIN LINGS: No, I don’t think so. I don’t think it was particularly special in the sense that some of the Budgets we’ve had in the past there’s been one or two interesting things to focus on. I think this Budget lacks a little bit of that - maybe it lacks a little bit of creativity in what he could have done. Remember at the end of the day we’ve got constant revenue overruns - the Minister had another revenue overrun this time, and we are really seeing in terms of taxes some tinkering on the edges. In terms of expenditure I think it’s a focus on the usual areas - maybe a little bit more emphasis on social spending - but it lacks a little bit of spark I would say. It does a little bit for everybody… ERIKA VAN DER MERWE: A bit boring Jean-Francois? JEAN-FRANCOIS MERCIER: Yes, it depends. If one has the choice of being boring or being risky for financial markets - rather be boring. One key thing for me in the Budget is policy continuity - we are seeing Budget fiscal policy very much in line with what we’ve seen over the past few years. If growth is good you move to a surplus - as long as you get revenue you can spend the revenues, but you remain prudent and try keep the Budget in surplus to offset in particular the fact that the private sector doesn’t save much, and that at the end of the day that’s good for the sustainability of long term fiscal policy. Now we can always debate whether public money could be used more efficiently, but at the end of the day there are still constraints. The ANC has adopted some resolutions - there’s new leadership in the party, and to a certain extent policy has to reflect that. We’ve already seen that in the State of the Nation address and we are seeing it in the Budget - under the circumstances it’s probably something the markets should welcome. ERIKA VAN DER MERWE: Ridle, do you agree continuity is important? What about the huge poverty out there and the need? RIDLE MARCUS: That’s right. First I’d probably summarise this Budget saying it’s well judged in difficult times. We certainly see what economic circumstances are at the moment globally and locally, and it is going into a period of economic moderation - so seeing the Minister being so conservative in his approach, and even predicting or expecting further Budget surpluses over the next few years is in one way very reassuring - but on the other hand I do think there will be more pressure over the next few years to spend some of that money for the poor and becoming much more pro-poor I’d say. ERIKA VAN DER MERWE: What would the market response be to that? We’ve had criticism all afternoon that there’s way too much growth in social spending as opposed to economic services spending? KEVIN LINGS: I think that’s fair. Remember the government is saying there’s 12.4 million people getting social grants in South Africa - that’s huge. If you go back a few years that started off around two to three million so growth is almost 20% a year - and you get into a situation where you’re starting to pay people not to work. Now I don’t think we are quite at that level at all - but having the social system and having it expand, and it will expand further with these latest changes - you can do that well if you’re creating employment as the same time, in other words you’re taking people out of the net and they’re becoming employed and therefore self-sufficient. So this system in terms of the social payments is fine as long as it’s accompanied by increasing employment - and we don’t seem to be doing that of late. We did that a couple of years ago - that was good - but you need to sustain 500,000 to 600,000 new jobs every year otherwise that social payments system is going to get a bit out of hand. The infrastructure spending - we did allocate a lot of money to that, if you go back two years there was a sizable increase - the problem is the same problem. We just can’t spend that money effectively - so there is no point throwing more money at the infrastructure issue saying more money is going to solve the problem. We’ve got a whole lot of projects out there - be it Transnet, Eskom, the government itself - we just need to do those projects and then you will find other projects on the back of it. Money is not going to solve that issue at all… ERIKA VAN DER MERWE: Jean-Francois what would your tip for Trevor Manuel be about this issue for next year? We are hearing it’s difficult to spend more on certain issues because it’s just not being translated into action - and yet you can’t destroy the goose that lays the golden egg, and that’s the production side of the economy… JEAN-FRANCOIS MERCIER: I fully agree. Indeed in order to boost production you’re now at a stage where extracting productivity and efficiency from the existing capital stock or existing workforce doesn’t work anymore. It’s been done for the past 10 years. Now is the time to expand the capital stock - we do have infrastructure projects - and also expand the skills base, the amount of skilled labour that can then operate that capital. So obviously it’s not just up to fiscal policy - there is no point building or buying more machines if we don’t have people to operate them. There might be a need for additional funding for the investment programme because costs seem to be turning out higher than was initially expected - we’ve seen it with Eskom for instance where initially we were talking about R150billion, now that’s R300billion. At the end of the day yes, important is sustainability - whether the money can be spent efficiently. Social services and social welfare - it’s true there is very strong pressure, so from the point of view of social and political balance it’s important the Budget allocates a fair amount of money to those items - but at the end of the day already by emerging market standards South Africa does spend a fair amount on welfare. At the end of the day it’s also an issue of efficient spending - are the people who really need it getting it? ERIKA VAN DER MERWE: Ridle, is there a danger that we kind of would move beyond some equilibrium point - beyond some tipping point where we are just spending too much on the social side, and we haven’t ensured the growth momentum of the economy? RIDLE MARCUS: I think we are probably on that point already - we’re already spending over 50% and obviously risking becoming… ERIKA VAN DER MERWE: On social? RIDLE MARCUS: Social spending, yes. We’re obviously risking becoming a welfare state. I do agree with Kevin - the fixed investment side is one that creates jobs. I think where I am disappointed in this Budget is that I don’t think enough has been done to get foreign direct investment, and foreigners to come and invest in South Africa to get that cycle going even further. Government is obviously spending a lot of money on infrastructure development - and spending for the next few years - but the reality is that private sector fixed investment is probably the more important one as well, and at this point in time given the global issues that we’re facing and high interest rates domestically the fixed investment side from a private sector perspective is probably going to struggle at least in the short to medium term. So there needs to be more focus on tax and those types of incentives to get foreigners to come into the country and invest. ERIKA VAN DER MERWE: Jean-Francois, you’re presumably tapped into Citi’s global research and global way of thinking - at this stage what is the thinking about South Africa? For instance perhaps our weighting in a global equity index - that would be an indicator of the thinking… JEAN-FRANCOIS MERCIER: I don’t really have any clear idea about that, but what I can say is if you compare the performance of the rand for instance since the beginning of the year versus peer currencies - and these are currencies of other emerging markets - it has underperformed. If you look at the bond market it’s tended to underperform as well - so clearly there’s a little bit of deviance with suspicion towards South Africa at the moment because the growth story is not as brilliant as in the past few years because people don’t really know what the costs of the power crisis will be, because of uncertainty like will Jacob Zuma really want to follow the policies so far, or is he indebted to the communist party and unions? There is a bit of that concern - and that’s probably weighing investor perceptions of South Africa. At the end of the day the Budget is probably good news in the sense that it does not show any experimenting with any kind of radical social policy that might backfire. But the point was very interesting about whether South Africa is becoming a welfare state - I come from France, and when we talk about government spending as a share of GDP we are far ahead of South Africa. The problem is South Africa competes with other emerging markets where quite often labour costs are low and taxes are low because that’s how they want to attract foreign direct investment. There we have South Africa which has the laudable goal of having a social democratic system in an economy that is competing with more aggressive pro-corporate regimes - so that could be a risk at a time when SA needs foreign investment. ERIKA VAN DER MERWE: Kevin, do you agree that we are taking a risk from a foreign investor perspective? KEVIN LINGS: I don’t think this Budget will scare the investor at all. If anything the exchange control relaxation will be seen as positive, the cut in the company tax rate will be seen as positive. It’s a consistent Budget - we’re presenting a Budget surplus for the next three years. If you look at all the data that has accompanied this it’s fairly consistently presented - it’s superb documentation, you can see what’s going to be happening over the next while. There is continuity between the Mid-Term Budget Policy Statement and this Budget - it’s superb from that point of view - and in terms of not making any radical changes it’s excellent. So you can applaud it for a number of these issues - the point is does it address the number one issue? Let’s face it - what’s the number one issue in South Africa from an economic point of view? We have 25% unemployment. If we really dealt with that - have a look back over the last three years where we created something like 1.5 million jobs in four years, and look how well the economy did - ultimately that’s what we have to do. All the other things are niceties. How do we create 500,000 or 600,000 jobs a year, and what is the Budget doing about that? ERIKA VAN DER MERWE: It’s got a public works programme... KEVIN LINGS: It’s not delivering - honestly it’s not. I can understand that the tax cuts are fairly minimal at this time because the Governor of the SA Reserve Bank needs to control inflation - so you don’t want to go and cut tax aggressively, etcetera. But is this what we can do to create jobs in South Africa? Is this honestly the best we can do with a Budget surplus for the last how many years, with a revenue overrun that’s running over the last five years into something like R100billion? Honestly, is this the best we can do to create jobs? I’m suggesting it’s not. We could do more. ERIKA VAN DER MERWE: Let’s get some practical solutions. Ridle you’ve suggested for instance tax incentives for foreigners to come and settle here - what else? RIDLE MARCUS: First of all we’d probably have to start with the education crisis. We’ve got an education crisis and a skills crisis - so like Kevin said before it’s not enough to throw money at the problem. There needs to be some practical solutions as well - these include addressing the crime issue, and the judicial system needs to be improved. There are obviously steps to improve it, but again the question is has enough been done so far? You certainly need to stop the brain drain that’s going on at the moment. The Eskom problems are worsening the situation -people are leaving saying they will not be able to cope with these kinds of issues - so there’s a lot of socioeconomic issues that we need to address in order to move ahead. ERIKA VAN DER MERWE: Jean-Francois, practical measures from your perspective? JEAN-FRANCOIS MERCIER: It’s difficult to say. It’s probably not the realm of the Budget. The Budget is doing what it can - at the end of the day as we said it’s the efficiency of the money spent, also the consistency of the messages delivered across the whole government spectrum. Ridle was talking about avoiding the brain drain, about encouraging entrepreneurship, about nurturing skills. But sometimes you have confusing messages - the government says they want to boost agricultural production, but then there’s an admission that 50% of the resettled farmers are not really delivering. What is the solution? Yes, it’s important to redistribute land - but also to do it in a way that boosts agricultural production. That requires policy and consistency - consistent messages from the government. You can’t say we pay more money to pay the police better to fight crime better, to have more judges, more magistrates - and then you can’t give any credible reasons why you’re moving the Scorpions away from the NPA into the police. There is a problem with the consistency of the message across all the ministers and senior people. ERIKA VAN DER MERWE: Kevin, what to you was the most heartening aspect of the Budget? KEVIN LINGS: I would say consistency is superb - to me the way the Minister has over the years delivered a consistent approach to the Budgeting process makes it very transparent, makes it quite easy to see where some of the thinking is coming from, and where he is going. It doesn’t mean you necessarily agree with it, but I certainly think that’s encouraging. I think he has put South Africa in a superb position should we have some sort of difficulty in terms of something like revenue collection. Remember this economy is struggling right now… ERIKA VAN DER MERWE: The R5billion overrun this year... KEVIN LINGS: Sure. What I think the population hasn’t realised is we haven’t had a year where we’ve increased taxes - the Minister has been able to avoid that for us. So we are in a situation that even if revenue collection wasn’t that good we’ve got a lot of scope to buffer that - and I think we’re not recognising that superb position we are in. ERIKA VAN DER MERWE: Ridle, what is Trevor Manuel doing right? RIDLE MARCUS: I think his gradual approach. Every year there’s a little bit. For example the company tax - he reduced it from 29% to 28% so I think the message he is trying to get across is government is going to remain quite conservative over the near to medium term, especially with a lot of investors quite concerned about what the next move will be. If a new economic policy is being adopted what will be happening to spending - will it just skyrocket meaning huge deficits - so I think his message that we are going to remain conservative is quite heartening. ERIKA VAN DER MERWE: Jean-Francois, out of 10 what would you give Minister Manuel for today’s showing? JEAN-FRANCOIS MERCIER: Probably seven. www.summit.co.za Transcripts: onsub1@avusa.co.za tr/met Comments Related to this transcript: Comment on this transcript... Name : Email : Comments :