Posted: 2008-10-21 23:58 Mini-Budget - Part I  Presenter: Erika van der Merwe Guest(s): Hart, Parsons - Click here to listen to the interview Summit TV speaks to Chris Hart from Investment Solutions and Raymond Parsons from Business Unity South Africa (Busa) about Finance Minister Trevor Manuel’s Mid-Term Budget Policy Statement (MTBPS) Erika van der Merwe: There was little evidence of a radical shift to the left in Finance Minister Trevor Manuel’s Mid-Term Budget Policy Statement presented on Tuesday. On the details and implications of the three-year framework is Chris Hart from Investment Solutions, and Raymond Parsons economic advisor to Business Unity South Africa (Busa). There’s very few surprises in this statement, but there was a persistent theme throughout his statement on the political crisis and the economic consequences thereof - also a pat on the back for South African financial institutions. Chris, your initial impression? Chris Hart: Absolutely. It’s been vintage Trevor Manuel. This MTBPS is about stability and planning over the longer term. I believe it’s more important than the actual Budget - and if anything the surpluses that have been built up in past year are now standing South Africa in very good stead. As we go through more difficult times the Budget provides a shock absorber - we do not need to deviate from any plans and we can go ahead with the plans that have been put in place as we go through this slowdown we are facing. Erika van der Merwe: Raymond, those are complimentary words - do you agree? Do you see any evidence of a political shift that makes you uncomfortable? Raymond Parsons: No. I think what we saw today in the MTBPS was that the Minister of Finance was able to play his cards more flexibly in the face of adverse circumstances simply because of the prudent policies he’d been following up until now. I think the two pillars of the MTBPS were stability and confidence. The overarching message was yes, there is a global downturn - and there is turmoil - but although we are going to feel it we are going to be in a stronger position to deal with it, and we are in a stronger position to deal with it because of the fiscal policies we’ve been following up until now. Erika van der Merwe: Chris, some of the finer details you refer to reflect our flexibility - we will have a marginal surplus this year apparently 0.1% of GDP and then moving onto a small deficit next year... Chris Hart: Correct. That would reflect the slowdown in the economy that’s of course not really internally induced as much as it is externally induced. My suspicion is that the deficit might even be bigger than what is forecast because I think the economy may well be weaker than what is forecast - and that is simply because the pillars holding up the economy are in a sense being weakened. The commodity price fall-off in the last two or three months I think is going to have quite a big impact going forward - especially if these low prices are actually sustained. Of course we know our consumer is really flat on its back. I don’t know how we get to 6.2% inflation average without going into the target range - I suspect that might be too optimistic as well - and interest rate cuts might only occur in 2010 especially with the weakness of the rand we are experiencing now we are still going to get another surge of inflation. Erika van der Merwe: So you’re saying the inflation forecast is a bit heroic? Chris Hart: I think so, yes. Raymond Parsons: I think what’s important here is that where in some countries they are probably just going from a smaller deficit into a huge deficit in order to deal with the situation we are in a strong position that’s going to swing from a small surplus to a small deficit. That’s in fact the right thing to do and it doesn’t send out any negative signals. There are of course a number of uncertainties in the situation - I think he did the best forecasting job you can do in the face of uncertainty. In the face of uncertainty you can only take the best decisions you can on the information available - in that context I think that having taken a three-year view of fiscal policy gives us something with which we can look forward to a degree of predictability and certainty as much as you can, and a new government would cling to this strategy because I really think it will serve them in good stead. Erika van der Merwe: Do you agree Chris? Chris Hart: Absolutely. The strategy has been a good one. Effectively we get two feedback loops as far as government finance is concerned that are quite important - the Budget itself and of course the MTBPS that as I say outlines the strategic path going forward. The concern that I would have is that we are not dealing adequately with our savings rate - it is addressed, but I do believe that lip service is paid to it and that’s reflected in the forecast current account deficit that we’ve got. That’s the one weak area - I believe our low savings rate is the Achilles heel of the economy. If anything that’s the core economic problem - because effectively to buy the plant and machinery, the infrastructure, etcetera, needed to absorb the unemployed people into the economy we need to as I say buy more of that. The primary resource that you have got to be using is savings. If you don’t have sufficient savings that’s reflected in the current account deficit. I do believe that fiscally we should be leaning heavily towards in a sense penalising consumption, and rewarding savings in the Budget. I’m not sure if we are doing that. Raymond Parsons: What I would like to add here is of course you’re not going to change the savings culture in this country overnight - quite clearly from what was said today there’s a view that we need to embark on this a lot more seriously. We are vulnerable thanks to the current account. I would just though suggest that if we do want to grow and create jobs and do all the things we want to do we really have to do better in attracting foreign direct investment. That comes back to the broader policy framework - especially after the election you want an investor friendly environment that people will say “now the crisis is beginning to come right and we are sorting it out.” As the Minister himself said he is being asked the question “what are we doing when it is all over?” and “how well are we placed?” Erika van der Merwe: Where we will be when the crisis is over? Raymond Parsons: Exactly. One of the places I think South Africa wants is to be a preferred investment destination. That means a lot of other signals have to be right - but within that you really do have to generate more domestic savings as part of the solution… Chris Hart: If I could add there one of the things that also needs to be addresses is expenditure efficiency - we are throwing more money at education and health, etcetera, but my strong suspicion is that’s not going to be helpful until we address the expenditure efficiency - that we get value for money in what we are spending. We are not doing that in education - you can have zero pass rate schools and near zero pass rate schools, hospitals that kill babies - all of these things need to be addressed. Erika van der Merwe: On that topic we see government emphasising the fact that it’s pushing up the percentage of capex in overall spending - by 2011 and 2012 that’s expected to move into double digits, about 11% of government spending - will that do the trick? Raymond Parsons: I think really what we are saying is yes, you can generate these resources to do the things you want to do. South Africa really it’s problem of too much money chasing too little capacity. That seems to be the bottleneck that Agisa identified. I often in half a joke say that someone like Pravin Gordhan has done such a wonderful job at collecting taxes perhaps he should now be transferred to control government spending to ensure that we get value for money. Erika van der Merwe: We still get departments who aren’t spending… Chris Hart: Or spending efficiently… Raymond Parsons: That’s a very serious problem. Although we speak at an intellectual level about the development state I think if you really want to mobilise the country around this kind of issue you must talk about the delivery state. I think people can relate to a delivery state because that’s telling them what needs to be done. Chris Hart: Absolutely. I think whereas government capital expenditure is reaching 10% or 11% and that I think is a positive sign - but the bulk of economic growth and future job creation is going to come from the private sector, and private sector capital expenditure has been carrying the country through over the last decade. The economy has created an enormous amount of jobs over the last decade by the private sector where it’s gone from between 8 million and 9 million people to now between 13 million and 14 million people that are formally employed now. That’s been thank goodness for private sector capital expenditure - because if that didn’t happen this economy would have languished in the doldrums over the last 10 years. Capital expenditure is really chasing the economy - it’s playing catch-up with the rest of the economy. Raymond Parsons: I think we should also go down on our knees and be grateful that we have got 2010. Thank heavens we didn’t get it last time around - we must thank that New Zealander for having voted against us. That’s one of the shock absorbers for the next couple of years - the fact that we have to invest infrastructure, and not only for the longer term. The 2010 World Cup concentrates the mind wonderfully - you have to get certain things done by then. That certainly underpins our performance. The private sector in fact is responsible for about 70% of what is invested in the country - so what you have to ensure is that you continue to have an environment in which they will want to go on investing - otherwise you are not even going to get your 4% or 5% growth rates. Continues in part two… www.summit.co.za tue/met Comments Related to this transcript: Comment on this transcript... Name : Email : Comments :