Posted: 2008-10-21 23:58 Mini-Budget - Part II  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: Welcome back to our discussion of the SA Reserve Bank Mid-Term Budget Policy Statement (MTBPS) with Chris Hart from Investment Solutions and Raymond Parsons from BUSA. We finished the previous session with a discussion really around government being there as a means to create an enabling environment for the private sector? Chris Hart: Absolutely. Capital expenditure growth I think is very commendable - because that’s starting to help lay the platform for additional infrastructure, and that additional infrastructure gives people the capacity to do business. However, it’s not about the government itself - one always needs to balance the need of what the private sector is busy generating, because everything the government is spending has to be earned by the private sector - and of course you also need to leave extra capacity within the private sector to generate the growth they have been over the past several years. Otherwise you can effectively strangle the tax base by trying to have grandiose plans that are seen as an end in themselves. They are not an end in themselves - it’s really only a springboard for the rest of the economy to go forward. Raymond Parsons: What’s important here - not that one must not become in any way ideological about what should governments do or not, or get drawn into the “isms” debate - but it is important in South Africa to get clarity on certain issues if we want good economic performance in the future. One is what should the government do, what should it not do, and what should it ensure is done? When you think creatively about that you can come up with all sorts of new formulas whereby you can mobilise the private sector effectively in an unconventional way to ensure delivery. We mustn’t think on rigid ideological lines as some people are inclined to do. I think we have to be practical. The only “ism” I believe is problem solving is in fact pragmatism. Chris Hart: Yes. Erika van der Merwe: To a large extent we are seeing government’s role here in terms of providing for the needs of the poor - or trying to expand its ability to do that. With the Budget moving into a deficit situation in 2009 that is partly because of lower revenues, partly also because of increased spending. Breaking that down it’s R170billion worth of additional spending added to this three-year framework. That’s the Eskom loan and adjusting for higher inflation - but there’s about R64billion left a lot of which is devoted to social spending. Chris Hart: That’s right. I think the social spending need is there, but this kind of spending is poverty alleviation. We’ve done a lot of that over the past 10 or 15 years. We really do need to - but do we have the tax base to do more? I really do believe we need to be focussed more on poverty reduction where you don’t need to actually give grants - where people are actually standing on their own two feet. That poverty reduction means generating jobs - it means that we need to be opening the economy so that the sectors that have been over-concentrating get more competition. It helps to draw more people into those sectors, and it also helps to control inflation. It’s those things that one can actually do with industrial policy. Erika van der Merwe: This is at the heart of the debate… Raymond Parsons: It is. What we saw in the MTBPS was the culmination of a number of reports we’ve had over the past few years. We’ve had the Harvard panel, we’ve had the OECD report, we’ve had the Growth Commission and of course we’ve got the Accelerated and Shared Growth Initiative SA (Asgisa) itself that identifies six constraints that prevent us from doing better. It is interesting and very perceptive of Asgisa to have put the volatility of the currency at the top of the list. They were certainly very right. What this is saying to us - and this is what the MTBPS is saying - there are fundamentals there about what we should be doing to create more jobs. Whether that’s on being more globally competitive - which he had a lot to say about today, where he said we cannot distance ourself from the world economy and whatever is happening at the moment, where we will have to deal with China and India later on again or whatever the case may be, skills and getting the labour market to work better, to have more labour absorbing growth. It’s all there - it has to be implemented or as I like to say we’ve got to be better at “walking the talk.” Erika van der Merwe: Chris, are we at a comfortable enough situation? There is so much flux politically one wonders - are we busy shaking the very foundations of our economic policy thinking? Chris Hart: This MTBPS doesn’t shake the foundations of the thinking. I think that’s right - I think it would have been the wrong time to do so. One of the things I was very pleased about is that we are not moving to a 3% to 9% inflation target - we are sticking to 3% to 6%. If we went to 9% in the context of a 13.6% inflation rate that would have been as good as abandoning inflation targeting - and that would have been an investment killer and a growth killer. That I think has been very good. I think the Minister was also fairly steadfast against the various forces that are busy pulling at his department wanting to do this, wanting to do that - I think his integrity held out there. Raymond Parsons: I think what has come through is what came through in the previous mini-budgets and in the main Budget - the thrust of fiscal policy over the years has been to try and generate a message of more certainty and predictability. Chris Hart: And sustainability. Raymond Parsons: Absolutely. We have a broad idea of where we are going - that although the numbers may change, and may have to be tweaked over time - the better you get at it the less you have to tweak them. An important point is now we’ve got another three year view of spending. I come back to my point - a new government would hang on to this for dear life, because it creates a stability centre around which various decisions can be taken. The important thing is that with the markets as jittery as they are you don’t want to superimpose any other uncertainties or any other risks that you can avoid that are then domestically generated. We really need to manage this downturn carefully - and I think that’s what the MTBPS has done very successfully. Chris Hart: That’s fortunate in the sense that the rand weakness that we’ve had and the instability has been externally generated. I do believe once the rand has finally settled down and the external conditions start to settle the rand will get back to maybe the 8.50 level - but in the meantime we are in for a bit of a rough ride. We need to actually try and at least get our macroeconomic numbers correct - and that’s including a more sensible current account deficit, and again a higher savings rate to try and at least reduce the volatility in the currency. Raymond Parsons: That comes back to the point he emphasised which many people lose sight of in their discussions about policy - in the long run every study and every market experience has told us we have to become more globally competitive, otherwise in the end you will not create the jobs or get the growth you want. Chris Hart: Unfortunately a lot of the political debate, etcetera, is very insular - in other words it’s not put in the context of what’s happening externally. We are slipping down the ranks in many instances of global competitiveness or economic freedom, whatever the case - we are definitely slipping. Even if we are making progress that’s not at the pace that the rest of the world is - so I certainly concur… Erika van der Merwe: The timing of this MTBPS has highlighted how we are in fact affected by global factors with the adjustment in the growth forecast pretty radically revised downwards - this year for instance 4.3% was the original forecast and that’s down to 3.7%. Also, Manuel’s reference to the cost of funding - he said a year ago there was a spread of 0.65% over the US long bond rates, and today that’s more than 4% higher than the US long bond rate - so as you said earlier we can be thankful that things were in such good order so we could be flexible. Chris Hart: Exactly. Raymond Parsons: At the same time those growth forecasts are a reminder and a message that we really can’t be complacent - because when we think of what we ought to be doing in terms of growth, employment and in terms of poverty alleviation - you can do much more with a 5% or a 6% growth rate. It’s a necessary condition not a sufficient one - but a necessary one. So I come back to the issue of the constraints - we’ve got them on the table, we know what they are. We must work on them a lot harder because I would not like to see - and I don’t think the new government would like to see - that the best that they have at their disposal is a 3% to a 4% growth rate. I think that they really will want something a lot more with which they can do a lot more. That means that we know what has to be done and we must get on with it - especially on the skills front. That permeates both the public and the private sector - the skills shortage like sand gets into every piece of machinery. Chris Hart: Absolutely. There is no reason why South Africa can’t grow at 6% to 8% or 8% to 10%. You just need the right policy platforms. It is not that there is a genetic code that says South Africa must have high inflation and low growth. If anything to get that higher growth we need to strengthen the inflation targeting policy to maybe get it to 2% our target so that you can actually release the growth rate. Raymond Parsons: What’s also interesting when I had a Chinese economist come and see me recently - he was all agitated saying then “we have an 11% growth rate - we have a runaway train in China.” I said “give me that problem.” To go from 11% to 9% is not as traumatic as going from 5% to 3%. So we have got to understand these dimensions and we have to accept these challenges and put ideology on one side and get on with it... Erika van der Merwe: Your discussion has shown how difficult it is to put ideology aside and get practical. Mr Manuel was practical today - lots of details. Chris, in closing, from your side - a thumbs-up for what he is doing? Chris Hart: I would think so. Definitely thumbs-up. As we say the criticism is more on nuance than substance - and in substance this is exactly what the country needs is stability and certainty going forward. Raymond Parsons: I think it’s three cheers for the MTBPS under difficult circumstances. I think the Minister with his track record showed that he lived up to the Kipling’s saying and kept his head when all those around were losing theirs. I think he has kept a cool head and in difficult circumstances he is taking the right decisions. www.summit.co.za Transcripts: 082 962 2772 sa/met Comments Related to this transcript: Comment on this transcript... Name : Email : Comments :