Confronted with a precipitous decline in SA's economic prospects, finance minister Trevor Manuel has produced a crisis budget that ramps up spending by R161bn amid falling revenue and growth.
The 2009 budget will shock those who expected Manuel to continue in the fiscally conservative mould of the past. Only a year ago, Manuel was budgeting for a fiscal surplus equal to 0,5% of GDP in 2009/2010. Now he is budgeting for a deficit of 3,9% - an aggressive swing in the fiscal stance.
To fund this, government debt (net loan) is set to climb from 22,6% to 27% of GDP by 2011, whereas just four months ago in the medium-term budget policy statement, it was set to fall to 19,9% by 2011. Despite this ratcheting up of debt, the budget has no new trappings to show for it.
Cut of the cloth finance minister Trevor Manuel's expansionary budget means Sars commissioner Pravin Gordhan will have to budget for R50bn less in tax receipts
Even the detailed economic stimulus package that many were hoping to see is manifestly absent. The message is that, like stressed households, SA must make better use of what it already has.The larger deficit projection reflects treasury's view that GDP growth will drop this year to a mere 1,2% (previously 3%), wiping R50bn in expected tax revenue off the table. To hold the deficit below 4%, Manuel has also had to cut R19bn off the exuberant expenditure adjustments for 2009/2010 tabled in October, though he was careful not to cut education, health, municipal transfers, social grants or capital expenditure.
As a result, government spending will now grow at an average 5,1%/ year in real terms over the next three years, not the 6,1% previously budgeted for during last year. This is still a strongly expansionary budget in a country where GDP growth is likely to slow to a crawl.
Treasury's weak GDP forecast of 1,2% for 2009 implies that Manuel believes, or already knows, that the economy shrank in the fourth quarter of last year. It's therefore incumbent on the budget to pull back the economy quickly enough so that SA is not labelled as being in a recession.
Manuel says he has reacted to the "economic cataclysm" of world events and while the remedy of fiscal stimulus has become fashionable globally, he felt compelled to spare future generations the burden of running up an even larger deficit or bailing out troubled firms and industries.
Instead, Manuel handed out almost twice as much personal tax relief (R13,6bn) as last year - the rationale being that it makes more sense in terms of preserving jobs and growth to stimulate consumer demand rather than to identify companies for salvation.
"I could easily, with an election looming, announce a 20% deficit, spin all kinds of stories about stimulation, tell industry to come knocking and we will throw money at you, but none of that represents honest solutions in a democracy which looks at the future, not only the present," he said.
Manuel argued that SA already has a stimulus package - and one that is, unlike America's, already turning sods - in the form of the public-sector infrastructure programme.
This package is being expanded from R600bn to R787bn over the next three years, with a further R6,4bn for public transport, R4,1bn for school and clinics, and R5,3bn for municipal infrastructure and bulk water systems.
To accelerate job creation more directly, a further R4,1bn is being set aside for the second phase of the public works programme and R3,7bn is added for low-income housing projects.
Another leg of the stimulus package is to strengthen the balance sheets and involvement of SA's existing developmental finance institutions - "to get more of a kick out of the mule of spending", Manuel says.
There is an additional R1,6bn to support industrial restructuring, and R1,8bn more for rural development and small farmer support.
Manuel's answer for the beleaguered motor industry is that it already has the new R870m automotive production & development programme (APDP) which includes a production subsidy.
Treasury officials say they wouldn't be surprised if there are shifts during the year within the trade & industry department's budget to adapt the APDP to deal with the fall-out from the crisis.
To support the mining industry, Manuel has deferred the royalties regime from this year to 2010 - a welcome boost worth R1,8bn that will assist in minimising job losses.
In addition, he is considering the creation of a new development agency, to be jointly managed by labour, business and government, to invest in the economic development of mining towns and labour-recruitment areas affected by mining retrenchments. He hopes this will become a model that is replicated in other sectors.
As to other industry-specific support packages, treasury officials say they could not pre-empt the tripartite discussions taking place in Nedlac on how to cushion the economy against the global recession. But Manuel is clearly far from convinced, saying: "We will have to distinguish policy from favours... You can't arbitrarily choose losers and winners as if policy doesn't matter."
The biggest adjustments to spending plans go to poverty reduction: R25bn is added to the budgets of provinces, mainly for education and health care, and R13bn for social assistance grants to accommodate another 1bn beneficiaries this year.
The total number of persons receiving grants is set to exceed 13m by April, but there was no move to increase the age of eligibility for the child support beyond the age of 15, despite election promises that the grant will be raised to 18 years old.
All in all, Manuel argues that the 2009 budget offers a "substantial fiscal boost". Click here for FUNCTIONAL BREAKDOWN TABLE. Fortunately, "SA is not borrowing to rescue failed banks," he points out, "but to construct roads and power stations, the classrooms and hospital wards, to modernise technology and transform public service delivery, as the foundations of growth and broad-based development in the decades ahead."
But, as Manuel warned in his budget speech, "what started off as a financial crisis may well become a second great depression". How would SA's finances and budget projections hold up should this happen?
The medium-term projections assume that nominal spending growth will fall to around 7% in the 2010-2012 period from over 16% in 2009/2010; GDP growth will recover to 3% in 2010 and 4% in 2011. Consequently, the fiscal deficit will fall to 3,2% and 1,9% in each of those years, respectively. In other words, treasury anticipates a temporary deficit hump before things are turned around. But what if it is wrong? And how will spending be reined back to single figures under a new administration?
"The fact that a new administration will be dealing with future budgets, increases the possibility of meaningful revisions to future budgets, the first signs of which could become evident in the 2009 mini budget later this year," says Sanlam group economist Jac Laubscher. "For example, it strikes me that the resolution at the ANC's Polokwane conference to extend the qualifying age for the child grant to 18 years is not yet reflected in the Medium-Term Expenditure Framework."
As it is, the public-sector borrowing requirement (PSBR) is set to rise to 7,5% of GDP this year. Over the next three years, government will be looking to borrow R239bn to fund successive deficits averaging just under 3%. Furthermore, Eskom is being given a R60bn loan over three years, and government is guaranteeing R176bn of the utility's debt. Were it not for the R30bn that is being loaned to Eskom this year, the fiscal deficit would have come in at a far more palatable 2,6% of GDP.
WHAT IT MEANS
 Fiscal deficit rises to 3,9%
GDP growth to slow to 1,2%
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Treasury's head of public finance Andrew Donaldson acknowledges that a PSBR of 7,5% is "a striking number" but assures that the debt outlook is sustainable. While the gross stock of government debt is set to increase, the level of debt service costs as a percentage of revenue will be maintained as maturing debt is refinanced and new debt is issued in a more favourable interest rate environment, he explains. As a percentage of GDP, the cost of servicing debt is set to remain moderate, averaging 2,2% over the medium term.
"We're in the fortunate position, where having brought debt levels down over the past decade, we can continue to expand spending and accommodate falling revenues for a couple of years if the downturn lasts," says Donaldson.
