Conservative spending or widening the deficit?

Today, the Select Committee on Appropriations received a post-budget presentation from the Parliamentary Budget Office (PBO), focusing on various factors affecting revenue and expenditure as well as the country’s economic growth, which is predicted to be quite low over the next three years. The question also arose as to whether government’s spending was too conservative and if an increase could benefit the country in the long term.

Economist for the PBO and for the National Treasury in the economic policy division, Rashaad Amra, told the Committee that the National Treasury has forecast Gross Domestic Product (GDP) growth to be: 2.7% in 2014, 3.2% in 2015, and 3.5% in 2016. These forecasts were generally quite high for the National Treasury, who usually took a more conservative route than the private sector.

Lower growth means that there will be slower growth in revenue. To add to this concern, the National Development Plan (NDP) targets a 5.4% growth to reduce unemployment. Which begs the question: With only half the growth predicted, how can we close the unemployment gap?

The ANC’s Charel De Beer pointed out that most African countries were experiencing growth rates of 5% so it was worrying that South Africa’s projected growth was so low.

Following from this, Amra explained that the National Treasury predicted inflation of 6.2% in 2014, 5.9% in 2015, and 5.5% in 2016. Inflation reduces the scope for real expenditure increases. Amra assured the Committee that “government spending is not one of the drivers of inflation… inflation is the general increase of all prices, not just one thing”.

The DA’s Dennis Joseph expressed concern that although inflation was the increase in prices in general, “when there is an increase in the price of petrol, there is a ripple effect on the prices of other goods”, and poor communities wanted to know why these prices do not deflate once the price of petrol decreases. Amra responded simply that business owners generally do not drop prices once they are raised.

A consolidated fiscal framework developed by the PBO showed that estimated growth in revenue collection is slightly lower than the forecast GDP growth; however, expenditure growth is slower than revenue growth because of the expenditure ceiling, which was implemented by the National Treasury in 2012.

When the Committee expressed confusion over what an expenditure ceiling is, Amra explained, “the objective of the budget ceiling is to reduce the budget deficit and debt levels”. The budget ceiling as implemented by the National Treasury stands at R1.03 trillion in 2014/15.

When MPs questioned how the expenditure ceiling was determined, the PBO admitted that they did not know the exact way the National Treasury calculated it. Other countries seemed to have a fixed way of determining the ceiling; however, the South African methodology was not documented.

According to the PBO, South Africa’s budget deficit is lower than other countries, and it is projected to narrow from 4% in 2014/15 to 2.8% in 2016/17. The country’s debt level is also lower in comparison to developed countries such as Japan, the United Kingdom and the United States.

“South Africa is not doing too badly when compared with other countries,” he said, “We are maintaining our deficit. However, because we are a developing country, we could look at not being so conservative with our spending. The South African way of thinking is to balance revenue and expenditure, but this is not always practiced internationally. There could be benefits from increasing expenditure.”

COPE’s Mafemane Makhubela expressed concern over whether government’s spending was conservative or “disciplined”. Other MPs were open to the idea of increasing government spending, with the DA’s Alf Lees acknowledging “when government spends more money, it is not inflationary because that money is already in the system”.

The DA’s Joseph drew the Committee’s attention back to the NDP, asking why the government could not take the decision to spend more money now the way it did on public infrastructure for the 2010 FIFA World Cup. “We should look at the NDP this way; it can’t just be business as normal… There is no reason why we can’t spend more money now”, he said.

Amra added that the World Cup was successful because, for the first time, South Africa had one vision. “Income inequality is getting bigger and we don’t trust each other… Look at any successful economy – a common vision drives success”, he said. He warned that “hard decisions” would have to be made going forward regarding government spending.