Capital investment ‘to sustain growth’

28 October 2009

A sound fiscal position has allowed the South African government to sustain public service delivery while increasing spending on fixed capital investment to boost economic growth and create employment, says Finance Minister Pravin Gordhan.

Presenting his Medium Term Budget Policy Statement in Parliament in Cape Town on Tuesday, Gordhan said that low levels of public debt had also enabled a rapid increase in infrastructure spending, much of it supported by government-guaranteed borrowing by the country’s state-owned enterprises.

Supporting economic recovery

Gordhan said state investment in capital infrastructure had increased from 5.9% of South Africa’s gross domestic product (GDP) in the second quarter of 2007 to 9.4% in the second quarter of 2009.

While South Africa’s GDP was expected to decline by 1.9% overall for 2009, the economy was expected to move back into growth in the last quarter of the year. GDP growth of 1.5% is forecast for 2010, rising to 3.2% by 2012.

According to Gordhan, the government has taken a number steps to support the country’s economic recovery, including:

  • sustaining public spending and government employment programmes;
  • helping state-owned enterprises to increase their investments;
  • bolstering municipal capital spending through development finance institutions;
  • maintaining expansionary fiscal and monetary policies only for as long as necessary; and
  • reinforcing South Africa’s state social security net.

Job creation

Yet the country’s biggest challenge remains job creation. Employment levels fell by 3.4% in the first half of this year, with the highest ratio of jobs lost in the agriculture, domestic work and informal sector.

Only 42% of the population between 15 and 64 years old are in some form of employment. In the former apartheid “homelands”, only 30% of adults have jobs.

This compares unfavourably with fellow emerging economies Brazil and China, where about two-thirds of the adult population have work. South Africa’s labour absorption rate is also lower than Ghana, South Korea, Brazil, China and India.

“If the country does not find a way to resolve this problem, there will be catastrophic implications for social stability and future growth,” Gordhan said.

Productivity

The country also requires a higher productivity, and the government plans to take steps to raise employment and lower the costs of production to boost South Africa’s competitiveness, he said.

The volatility of the rand has also drawn some attention, because it affects exports. Since 1994, nominal exchange rates have depreciated by 60%, making the rand far more competitive today than it was 15 years ago.

With this in mind, the government is to relax exchange controls to lower the cost of doing business and promote investment. The inflation rate will also be kept in check to ensure that it is not higher than that of South Africa’s trade partners, as this would undercut the country’s competitiveness.

Cost-cutting

Over the next three years, the government will also clamp down on wasteful public spending, in three phases, in a bid to develop a more effective public service.

Gordhan said state tax revenue had fallen by about 3.2% of GDP, with the biggest declines in VAT receipts, company taxes and trade taxes. To widen the tax base, the government is considering improving tax compliance and introducing new taxes, such as environmental levies.

A budget deficit of 7.6% is projected for 2009/10, from a deficit of one percent in 2008/09, while revenue projection is expected to recover over the next three years.

Source: BuaNews