In his book Winning, Jack Welch describes the budgeting process in most companies as "the most ineffective practice in management". He goes on to say that "when companies win, in most cases it is despite their budgets, not because of them". In his characteristically blunt manner, he places a fair value on one of the most enduring corporate rituals that absorbs the time and energy of directors and management at all levels.
Welch is not suggesting that financial planning in organisations be discontinued. As someone who ran a business empire with a turnover to match that of a small country, Welch emphasises the need for a planning process that focuses on the optimal allocation of resources to maximise profits.
His frustration is with the horse-trading and compromises that generate suboptimal budgets. He sees the need for flexibility in response to, or anticipation of, competitor activity and market conditions. Hence, for him a budget is not a static document, but one that is regularly reviewed, becoming part of the management process. It is not an annual event ending in approval by the board after a presentation by the finance director.
Do Welch's comments apply equally to countries and companies?
At face value, the national budget involves compromise, extensive analysis and speculation, culminating in the public presentation of the budget document. The drafting involves senior staff from across government and is an all-encompassing duty of many in the treasury during the months leading up to its release. Extensive media speculation during the build-up to the national budget speech fills column metres of print and many hours of broadcast time.
The budget delivery is an event accompanied by metaphorical drum rolls and trumpet blasts. The financial press and broadcast media then give it maximum coverage, including special budget supplements. These are factors that in the corporate world might cause a Welch to shake his head in exasperation.
However, unlike corporate budgets, the national budget is more than a comprehensive financial plan. It includes directives for action to people other than state employees. With the exception of competition for international investment funds, the national treasury does not operate in a competitive environment, nor does it risk insolvency. Tax rates and benefit levels and thresholds announced are not mere plans but concrete changes that directly affect the lives of individuals. The national budget, therefore, requires closer scrutiny and greater respect.
Finance minister Trevor Manuel has again used his national platform effectively to expound government's economic policy and to announce tax and benefit rates, and expenditure allocations. For each of us the first thoughts are: "What is this going to cost me?" and "What do I get out of it?"
The SA Revenue Service has become very effective at revenue collection, especially from individuals and small enterprises. This efficiency, along with economic growth, has allowed for relief on income tax and estate and transfer duties. However, this is offset by the increased "sin taxes" and the insatiable demands of the Road Accident Fund.
To give credit for the reduction in retirement fund tax can be compared to congratulating someone for driving drunk once instead of twice a week. This tax should never have been instituted. British experience has shown that its introduction was one of the key reasons that their retirement funds have gone from the best funded to among the worst in Europe in under a decade. So the reduction of tax on income and wealth accumulation is to be welcomed.
Those with substantial investment portfolios will welcome the further relaxation in the offshore foreign currency allowance. This move gives further evidence of the minister's confidence in the health of the SA economy to compete for investment funds without artificial restrictions.
The 5% increase in old age, foster care and child support grants will give welcome relief to families subsisting on these payments. Though in line with national inflation, it is probably less than the increase in costs experienced by recipients.
The bulk of the expenditure plan needs to be seen in the same way that Welch views the average corporate budget. Manuel presented a range of sound-looking allocations, with priority given to education, health, welfare and development. However, given the national demand for quality education and health care, and the underinvestment in these areas over many decades, it is disappointing that the budget has not encouraged private involvement through the provision of tax relief. Relief has been reduced on medical expenses by the increased threshold for deductions. The budget also takes the anomalous position of providing relief to companies that give bursaries, but not to families who fund their own education through paying school and university fees.
In summary, this budget can be seen as offering clear benefits for individuals through tax reductions. It can also be seen as a missed chance to encourage personal responsibility.
Michael McDougall is general manager, retail finance & actuarial research at Metropolitan Group
