A Home-Grown Sizeable Stimulus

Last year Finance Minister Trevor Manuel’s Budget speech took the form of a weather forecast complete with weather maps warning of storms.

Little did we then know that the global financial crisis would turn into a full-blown hurricane wreaking further devastation in the global real economy with the IMF slashing its global growth forecast to 0.5% – the lowest since World War II. The IMF sees a drop of 1.6% in US GDP in 2009 and another drop of 1.6% in 2010. With respect to the Euro area a fall of 2% is expected for 2009 and growth of just a meagre 0.2% in 2010.

Yesterday Minister Manuel reported our domestic economic growth projections would be starkly down at 1.2% for 2009 and that we would need to manage the global gale-force winds carefully.

Given the recent budget surpluses that we have unusually enjoyed and debates about fiscal space, events in the global economy have rendered these forecasts redundant. Having reduced government debt from 48% of GDP in 1996 to 23% today, Manuel was in an enviable position by any standard to table his Budget.

This year – emphasising the role painful fiscal austerity started in the Madiba years has had on our ability to weather the global perfect storm – Minister Manuel unfurled a large protective umbrella replete with tax cuts, increased spending (and borrowing) and social grant increases and a massive boost for the fight against HIV/AIDS as well as safety and security preparations for the 2010 World Cup.

This reinforced umbrella does not come cheap. Deficit projections of 3.8% may be comparatively uncontroversial, given what is happening with fiscal stimulus packages the world over, but it will only be less controversial if it does not become a permanent feature of budgeting. It must remain confined to the consequences of a lower revenue performance as seems to be the case in Manuel’s 13th Budget.

Given that the projected deficit is up significantly from the 2% forecast in the MTBPS in October 2008, it is surprising that it was not greeted with slightly more controversy or at least more significant debate.

However, we have to remember that the global economy remains in peril – even after US Treasury Secretary Timothy Geithner’s recent US$2.5 trillion TARP revamp – with Dr Doom Nouriel Roubini, who was quoted by Minister Manuel, believing that the crisis will still get much worse. If this happens our deficit could even be higher than the projected 3.8%.

Whilst much market speculation about company ‘bail-outs’ and steps similar to those taken in many countries informed pre-Budget speculation, our fiscal stimulus is in essence an increase of a fiscal stimulus we have already been undergoing for a while. Top ups of existing fiscal stimulus features such as the ongoing massive infrastructure investment programme; more expanded public works job creation responses; and a plethora of social grant increases – that cushion the most vulnerable in our society against the worst vagaries of the greed and irresponsibility in other countries that have caused near-economic cardiac arrest in our global village – are clear features of an ongoing process of stimulus.

However, we need to be cognisant of at least four considerable threats we continue to face:

• Firstly, our ability raise capital on global markets for some aspects of our home-grown ‘stimulus package’ at prices we find acceptable,
• Secondly, the ongoing Achilles heel of our current account deficit (which will be subjected to a high import bill for the infrastructure spending in the Budget) and consequent currency volatility,
• Thirdly, the inherent imbalances of insufficient job-creation and social-grant dependence that has alarming long-term fiscal consequences, and
• Fourthly, the natural post-electoral political temptation of continuing higher deficits pursuant to the 3.8% as a matter of policy – a threat a new administration will have to counter.

What speaks loudly beyond the Budget figures, and indeed in the Budget speech’s call for national unity, is the need to grow a new corporatist model – not the old-hackneyed and nearly discredited variety of stakeholder collaboration between government, business and the trade unions in this time of global crisis and local stunted growth to not only weather the storm but lay a solid foundation for more aggressive and higher growth when the world economy surmounts its current slump.

Whilst a task team is currently considering various country responses to the global crisis and reports to and from Nedlac are pending, as are briefings to the President, the National Treasury’s proposals create sufficient room – arguably in the contingency reserve and in many of the proposals themselves – to respond to any additional priorities that may emerge pursuant to these consultations.

Minister Manuel has walked a tight-rope of expectations in an election year of a pending new administration amidst global storm clouds and thunder-claps with aplomb. No one can criticise him for not being sufficiently pro-poor in this Budget nor for completely ignoring the Polokwane resolutions or for being insensitive to the needs of business under duress given the forestalling of the mining royalty dispensation.

Whilst no-one is irreplaceable in public life – a point made yet again by the Minister himself – it seems difficult to contemplate who would be a worthy successor to the world’s longest-serving Minister of Finance. Indeed, his clearly emotional invocation of the 19th anniversary of Mandela’s release from Victor Verster felt like a muted form of a political farewell in the making.

Raenette Taljaard
Director
Helen Suzman Foundation