Looking positive

Wednesday, 31 March 2010 13:43

A commendable budget under enormous economic pressure

In his first Budget Speech, Finance Minister Pravin Gordhan presented South Africa with a very respectable budget. None of the major taxes – income tax and VAT – was raised. That is good news, indeed. And something that was long overdue: he spoke out about high civil service pay and poor service.

There is no way the economy could afford further increases in the major taxes, but the relief was short of the inflationary effect (bracket creep) for anyone earning more than R90 000 per year.

New carbon taxes on most cars will increase the price of quite a few vehicles in the future, but expect more of this type of new tax as the government seeks new forms of income.

Perhaps the biggest surprise in the Budget and its documents is the fact that not much was said about the proposed National Health Insurance or Social Security – two very big post-Polokwane ANC policies.

Implementing them fully and simultaneously would add about 15% to our tax-to-GDP (gross domestic product) ratio and that really would increase the tax burden to unsustainable levels.

So financial advisers are here to stay for at least another three years or so (probably for much longer, as affordability is the actual issue).

Private retirement annuities and pension funds as well as medical schemes are here to stay and advice will be required by most consumers when buying these products – that is good news for the thousands of financial advisers.

Moreover, financial advisers should be glad that National Treasury has done the homework required, as the Budget review makes it clear that only the current private sector payments for medical services are close to 5% of GDP.

The Social Security fund had less work done on it, but simply using South African Reserve Bank figures, one can see this amounts to around 10% of GDP.

Inflation targeting remaining should boost savings in South Africa, as it will keep interest rates higher at the present levels. This helps people save through bank deposits and keeps spending in check.

While money in the bank is perhaps not the most efficient way to save, the fact is that it will help keep savings high, which generally will benefit other savings products over time.

No talk of nationalisation or fixing the rand will start to take these debates out of the public eye over time, as this is not a good recipe for economic success.

In fact, there was talk of public-private partnerships in the health sector and that action – more so than left-wing talk – is what we should be encouraging, as that will build the economy and bring more gains for all of us.

On the expenditure side of the Budget, it is heartening to see that housing gets the largest increase over the next few years.

Not only will this establish an asset base for many more households, it also will help bring people into the economy.

People who have permanent dwellings generally start collecting other assets such as televisions and stoves (televisions seem to come before most other things). This means that over time, the need for household insurance becomes a factor. This may take a decade or two, but will help grow services such as plumbers and electricians and later short-term and long-term insurance.

It is important to note, however, that a further two million people are expected to start receiving welfare payments in the next few years, which will bring the total to 16 million people. This part of the Budget is becoming less sustainable and will keep personal and company taxes high. At some stage, we will have to look at bringing more employment into our economy and not merely welfare payments.

While the minister did introduce a good idea to create first-time jobs with a state subsidy for the first two years of work, the fact is that many will not benefit, as the public education system is failing many young people in our country. We need to get the youth employed – but that will not happen by subsidies alone. A good start, but certainly not the end point.

Unemployment is our largest political problem and is at the heart of many social ills – from protests that turn violent, to crime.

No budget can be expected to sort out this crisis on its own, but the minister seems to be making the right choices here.

The problem is difficult to solve, but starting with making the civil service more effective would help, as better education, health and the like will bring more skilled people to the workplace who better will be able to deliver productively.

The government’s debt will double in the next few years, but as a percentage of GDP, our debt was below 25% at the start of the world’s great recession. This will leave us plenty of room – and with debt only growing to around 40% to GDP, South Africa still will have less debt to GDP than was the case in 1994, and way below debt-to-GDP ratios in countries such as America and Japan.

We will need to reduce debt from 2012 onward, which will leave more room for later spending increases.

I believe that this is a good Budget and a fair one, with little room for any tax cuts.

Financial advisers will sleep better at night without all the talk of National Health Insurance and government pension plans.

We may not be over all the negatives that this recession has brought, but the Budget actually helps in this time of need, as this is when governments run larger budget deficits and we are one of the few countries today that had real room for manoeuvre as far as debt-to-GDP is concerned.

My take is that the Budget deserves a score of seven out of 10, but could even be an eight if certain issues such as salary constraints were to be implemented in the next year or two.

Mike Schüssler
Director of economists at T-Sec, and twice named South Africa’s Economist of the Year

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