FINANCE: Profitable Year for South Africa

By Farhan Haq Reprint | | Print |

JOHANNESBURG, Feb 5 2003 (IPS) - By all accounts, South Africa will end its financial year with the government having collected more money than it spent over the last 12 months.

Ironically, this unexpected economic boost is likely to unleash criticism of the government, that is accused by some of its critics of not doing – and spending – enough to alleviate poverty in the country.

Government has budgeted for revenue of about R273 billion (30.3 billion U.S. dollars) – for the fiscal year ending, Feb 2003 – and expenditure of about just under R292 billion (32.4 billion U.S. dollars). This leaves it with an expected deficit of the region of R19 billion (2.1 billion U.S. dollars), for the fiscal year. However, many economists think government will collect up to R20 billion (2.2 billion U.S. dollars) more than it officially budgeted for, by the end of the fiscal year, on the back of better than expected tax revenue.

Over the past year, South African exports have increased substantially and the price of gold – one of the country’s main exports – has soared on international markets. This has meant that gold mines and private companies – among the country’s biggest taxpayers – have had a profitable year.

The South African Revenue Service (SARS) has also been dramatically increasing the efficiency of its operations over the past years, and has regularly been collecting more tax than budgeted for by the National Treasury.

Economists also doubt government will spend all of the R292 billion (32.4 billion U.S. dollars) it set aside for the year, mainly because of spending capacity problems in most South African provinces, among other reasons. Provinces are responsible for spending money earmarked for social services, grants and pensions and health and education infrastructure. While provincial spending has improved this year, they still have not been able to get through all the money provided for them in the national budget, according to reports from the National Treasury.

Substantially better than expected revenue and slow government-spending makes it very likely the treasury will end the financial year with a surplus.

A fiscal surplus is likely to create a political outcry, among trade unions and South Africa’s social movements. They have long argued that government should be spending more on social and economic development programmes, because of the country’s high levels of unemployment (around 37 percent) and extreme poverty (around 50 percent) in some areas. They believe government should borrow more money for social spending and allow the national deficit to grow slightly.

Especially in regard to some of the more controversial development and poverty alleviation programmes – like a Basic Income Grant (BIG) – government has said it does not have the money or capacity to administer the grant. It has also insisted that unless it keeps tight control of state spending – money that could be used for development programmes, will simply be used to pay interest on loans used to fund deficits.

In a paper released in November 2002, the independent Budget Information Service (BIS) found that the National Treasury continuously underestimated revenue collection up between 1997/98 and 2002/03. The paper comments: ”The remaining question is why the National Treasury would underestimate revenue collection. While it is always risky to speculate about intentions, revenue collection is plainly surrounded by a number of contentious political issues that it may be desirable to avoid. These would include the size of the deficit and the affordability of new expenditure programmes, such as the BIG. By the time actual revenue collection has been confirmed, the financial year has ended, and it is too late to influence or change decisions around these issues.”

Shun Govender, the BIS manager, explains that there is a policy debate in South Africa about how government can best use its revenue to kick-start economic growth and social development and alleviate poverty.

While some economists generally believe poverty can best be alleviated by tax cuts, aimed at stimulating economic growth; trade unions and social movements want government to spend more on development programmes and social grants, aimed directly at the poor.

However, it now seems that government may have enough money to pursue both options.

In last year’s Medium Term Budget Policy Statement (MTBPS) – which sets out government’s spending plans for the next three years – South African finance minister, Trevor Manuel indicated that some of the treasury’s surplus would be used to finance tax cuts. By leaving a little more money in South Africans pockets, the finance minister hopes to get them to spend more to boost the country’s economy.

However, the MTBPS also contains plans to increase spending on poverty alleviation, social security and education and health programmes. Manuel is expected to present the South African budget for 2003, in the next two weeks.