Medium Term Budget Policy Statement: 30 October 2007
Highlights from Trevor Manuel Speech:
South Africa industrial and labour market policies need to focus on labour intensity of the economy so that jobs can be created at a faster rate. Greater progress channelling young people into jobs has to be a central policy objective in coming years. South Africa's unemployment rate at around 26% is one of the highest in the world.
There is significant wage pressure in South Africa's economy following a series of strikes in the first nine months of the year. Upward pressure on wage settlements poses a risk to the inflation outlook if productivity growth does not keep pace.
Average wage settlements are to be in the range of 7% to 8% in 2007 from 6.5% in 2006. Real wage settlements have averaged about 2% since 2003 and will remain close to that level this year.
The Medium Term Budget Policy Statement, outlined by Finance Minister Trevor Manuel on 30 October 2007, has painted a picture of an economy beginning to face headwinds. Manuel emphasises careful management of risks on the macro-economic front, but also appropriate economic and social policy reforms to improve competitiveness, broaden participation and expand opportunities and capacity.
The MTBS introduces the structural budget balance, which adjusts fiscal policy for cyclical factors as an analytical tool to help in achieving the growth projections in the current, more uncertain, climate. In recognition of cyclical factors, a moderate budget surplus is proposed.
While total revenue is estimated to have increased to 553.1 billion rand for the 2007/08 financial year from 544.6 billion rand previously, a laggard is VAT collections, expected down by 8.1 billion rand in 2007/08. According to Tuesday's Medium Term Budget Policy Statement, VAT collections for 2007/08 are forecast down to 147 billion rand from 155.1 billion expected in February.
While revising its Gross Domestic Product (GDP) estimate for 2007 upwards to 4.9% of GDP from the 4.8% projected in February, the Treasury has also revised downwards its 2008 projection markedly to 4.5% from a projected 5.1% in February.
The expected moderation in growth in 2008 is largely a result of slower growth in developed markets as a result of the sub-prime mortgage crisis in the US and the associated credit crunch and slower, more sustainable growth in domestic consumption as the effect of higher interest rates takes hold. Although commodity prices have risen over the past year, record-high oil prices will act as a drag on growth.
While CPIX inflation in South Africa has been revised upwards markedly for 2007 and 2008, some moderation is seen in the forecasts over the following two years. The Treasury said that CPIX was now expected at 6.2% in 2007 from the 5.1% announced in February. The Treasury said CPIX inflation was expected to average 5.4% in 2008, but then to recede to an average of 4.6% in 2009 and 4.5% in 2010.
South African Finance Minister Trevor Manuel has revised downward slightly to 0.5% of GDP the government's budget surplus projections for the 2007-08 financial year from a predicted surplus of 0.6% of GDP in the February Budget, thanks to an additional 8.5 billion rand in revenue collections.
Continued strong growth in infrastructure spending is promised in the Medium Term Budget Policy Statement (MTBPS). South Africa's plans for power plants, rail lines, bus lanes and routes, dams, water purification plants, roads, ports and office accommodation are likely to see public sector gross fixed capital formation grow rapidly for well over a decade.
General government investment on the other hand is mainly focused on the built environment, which covers housing, water, sanitation, electrification, schools, health facilities, roads and public transport. These are designed to create sustained and viable communities.
South African Finance Minister Trevor Manuel said that the announcement of a 37 billion rand investment by the Industrial and Commercial Bank of China in Standard Bank indicates that international confidence in the South African economy is high.
He also noted that it perhaps signals a new place for Africa in the changing patterns of trade and finance flows of the 21st century.