The deterioration in the global economy, coupled with rising inflation and capacity constraints at home, have clouded SA's economic outlook. But finance minister Trevor Manuel delivered a confidence-boosting 2008 budget.
At a time of economic uncertainty, the markets will applaud Manuel for producing a slightly larger surplus this fiscal year than expected: 1% compared with the 0,5% budgeted for. Revenue is set to run over by a net R13,4bn.
A bullish Manuel expects growth to slow only mildly to 4% this year (previously 4,5%) and to average 4,3% over the next three years (previously 4,8%).
Despite slower growth, which means less buoyant revenue growth, he is still budgeting for a series of small surpluses over the medium term.
A main budget surplus of 0,6% of GDP is budgeted for fiscal 2008/2009, marginally more expansionary than expected.
In other words, government is continuing to save a share of tax revenue to offset economic risk. Despite this act of fiscal prudence, Manuel was able to go a long way towards satisfying competing needs.
On the one hand, he has cut the corporate tax rate from 29% to 28% and has taken bold strides in liberalising foreign-exchange controls; on the other, he has expanded the social security net and found an additional R115,6bn to spend. That will go to SA's priorities: social welfare, education, criminal justice, health care and economic infrastructure, including R60bn for Eskom.
"This is an incredibly strong budget," said an upbeat Manuel. "Its strength lies in the fact that we haven't been afraid to spend in areas that matter."
The budget was crafted to deliver a message of confidence to a nation reeling from high inflation and interest rates, faltering growth prospects and rolling electricity blackouts. The message is that despite economic uncertainty, the economy is resilient and treasury is staying the course.
"If we can stand in the face of what confronts us now and deal with foreign-exchange controls very differently, we can send a message of confidence," said Manuel.
Click here for functional breakdown table.
Nedbank chief economist Dennis Dykes feels Manuel has succeeded in restoring some confidence.
"They are sending out a message that we're business- and investment-friendly, and that we are still liberalising the economy and continuing on the path we set out on a few years ago," says Dykes.
Jeff Gable, head of research at Absa Capital, agrees. "It's vastly more market-friendly than I expected," he says. " The message we got is that despite the challenges, there's room to provide for new social spending and new encouragement to business. It's an impressive budget that makes a lot of people feel good."
Manuel said it was possible to hold course because the key policy anchors had been put in place early to stabilise the economy.
"The prudent fiscal stance, international reserves of US$33,6bn, the inflation-targeting regime and a floating exchange rate cushion us against shocks and reduce pressure on interest rates," he said, reinforcing his commitment to policies that are now up for debate within the ANC.
"It is precisely because of the macroeconomic policies put in place since 1996 and the fiscal stance in operation that we can be confident we will weather this storm."
The 2008 budget contributes to this legacy of fiscal restraint.
At the time of the October mini-budget, Manuel was budgeting for a series of main budget surpluses, averaging 0,6% between 2008/2009 and 2010/2011. They will now average 0,5%.
If the budget framework is adjusted to strip out revenues that are the result of cyclical windfalls (like high commodity prices) then the series of budgeted small surpluses turn into a series of deficits averaging -1,2% of GDP over the next three years.
Part of Manuel's solution is to engineer a slowdown in spending growth from close to 10% over the past five years to 6,1% (previously 6,4%).
However, in line with government's core priority of investing in social and economic infrastructure, public-sector infrastructure spending (including state-owned enterprises) is now expected to amount to R568bn, representing an average annual real growth rate of 19% over the next three years.
As a strong signal that government will support Eskom's funding requirements, the budget provides for up to R60bn for the utility over the next five years in the form of a long-term loan.
Possibly the biggest surprise was the announcement of a new tax - a levy on the sale of electricity at a rate of 2c/kWh - designed to encourage energy savings in the wake of the power crisis. This tax represents about 10% of current electricity tariffs, and aims to be revenue-neutral for those who comply with the government's target of a 10% electricity usage reduction.
The total tax relief to companies is R7,4bn with R5bn due to the reduction in the corporate tax rate from 29% to 28%. But Old Mutual business environment manager Abri Meiring argues that to really send the message that "SA is open for business", Manuel should have announced that the corporate tax rate would be cut from 29% to 25% over three years.
Even so, as a result of all these measures, government believes gross fixed capital formation as a share of GDP is on track to rise from 21% in 2007 to 24% by 2010, just short of government's target of 25%.
Click here for departmental budget table.
But how will this surge in fixed investment be financed?
The current account deficit, which reflects the fact that SA lacks the domestic savings to finance its mounting fixed investment bill, is expected to remain large over the medium term, reaching a sky-high 8% of GDP in 2010.
Asked what SA needed to do to ensure that it was able to finance this deficit, treasury director-general Lesetja Kganyago emphasised that SA was running a budget surplus precisely to cushion the economy against the external vulnerability created by having one of the largest current account deficits to GDP ratios in the world.
WHAT IT MEANS
 Budget set to stay in surplus over next three years
2008 growth outlook cut to 4%
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Running surpluses will allow government to increase its contribution to national savings from 0,8% of GDP now to 1,5% over the medium term.
The Budget review also acknowledges the need to boost exports to reduce the current account deficit. This means delivering on SA's industrial policy. To this end, the budget makes provision for R5bn worth of tax incentives in support of industrial investment and employment creation. Though any details are manifestly lacking at this point, Manuel stressed that accountability and efficiency would be the watchwords in how this money was allocated.
The 2008 budget supports labour-intensive initiatives, including providing an additional R1bn for programmes under the expanded public works umbrella. Learnership and internship schemes will be extended through spending and taxation measures, while a number of measures to support small businesses, including tax reforms, are proposed.
It is heartening that government is exploring ways in which skills-levy funds can be used to support further education and training colleges. The skills development levy is currently paid by employers and all of this revenue goes to the Setas and the National Skills Fund where billions in cash reserves remain unspent.
In addition to being pro-growth, the 2008 budget contains a strong focus on reducing poverty and inequality.
In 2007, government announced that it would prepare proposals for significant reform of the social security system, providing greater security for all. Detailing of the progress made so far was absent from the budget documents.
Says Meiring: "We know a lot of work is being done behind the scenes but there are also a lot of loose ends. It is absolutely critical for business to know where we're going on this. We've got to bed this one down. As a country we must get this one right as it will be one of the biggest budget items in some time."
As part of these reforms, the present social assistance net is being gradually expanded.
The child support grant will be extended to children aged 15 in 2009, from the age of 14, there will be increases in social grants in line with or above inflation, and there will be a reduction in the qualifying age for pension grants from 65 to 60 for men over the next three years. The means tests used to ascertain the eligibility for social grants are also being reviewed to broaden their coverage.
Efficient Group chief economist Dawie Roodt finds the expansion in the social security system disconcerting. "It is already unsustainable, we cannot afford it," he says.
SA has one of the largest non contributory social grant systems in the developing world. Social grant beneficiaries have increased from fewer than 3m in 1997 to an expected 12,4m in April 2008.
Consolidated expenditure on welfare and social security increased from R23,6bn in 1997/1998 (3,4% of GDP) to a projected R105,2bn in 2008/2009 (4,6% of GDP).
Roodt says the cost of the system is ultimately carried by the taxpayer and laments the fact that the overall tax burden has grown as a percentage of GDP from 22% in 1994 to 28% now, to the detriment of national savings.
"We are not getting the balance right between saving and investment," argues Roodt. "Yes, I'm delighted that there's a reduction in corporate taxes, but it's not enough. We can't go on like this. I'm seriously worried about the economy."
He attributes the budget's emphasis on poverty alleviation to the "Polokwane effect", speculating that the strong pro-poor resolutions that flowed from the ANC's conference at Polokwane prompted more generous social security provisions than would otherwise have been the case.
Manuel dismisses these suggestions, saying there isn't a huge gap or contradiction between the established policies of government and those of the newly elected ANC leaders. Anyway, by Polokwane "the budget was effectively done and dusted".
Of course, this week's budget will not fully lift market uncertainties about SA's long-term fiscal outlook, says Citi Group economist Jean-Francois Mercier, as the general elections in 2009 are likely to result in at least a partial leadership change.
But for now, it indicates that fiscal policy - while being consistent with the resolutions adopted by the ruling ANC at its congress in December - is not changing radically.
