Budget 2000 surpasses government fiscal discipline commitments and aligns fiscal policy with Gear promising to shift the economy onto a long-term higher growth path. However, Budget 2000 provides little protection in the interim for the most vulnerable groups, particularly children, the aged and the unemployed.

• The 2000/01 budget shows clearly the government's resolve to stick to the letter of its macro-economic policy in spite of its variable success over the past three years. It is clear, that government is resolved to minimise its intervention in the economy and restrict its actions to those that aim to create an economic climate that is conducive to private sector led growth. While fiscal discipline and greater transparency in the public finances are important to long-term growth and stability, a virtuous cycle of growth requires an initial stimulus. It is not certain from where this stimulus will come.
• Will government spending catalyse growth? Government is the largest player in the economy and fiscal policy plans a decline in government expenditure relative to GDP. Consequently, the 2000/01 budget is a maintenance budget - government activities detailed in the budget will not stimulate either growth or equity in the South African economy. Congruent with public expenditure reform in Gear, the government's efforts are targeted at improving the effectiveness and efficiency of spending. The set of activities within the Police vote provides a good example of this strategy, as well as proposals under the education vote.
• What will provide the kickstart to growth? The government assumes that the kickstart to economic growth will be provided through a set of tax cuts targeted at middle and upper income earners. Our recent growth history suggests that this is not a reliable method. Despite positive growth between 1991 and 1999, unemployment has increased significantly. While we welcome the certainty promised through inflation targeting, the narrow, low chosen band will further dampen growth. A slightly more flexible band may have provided a modest stimulus to the economy to complement the R10 bn tax reduction package in boosting employment.
• What will happen to the poor until Gear delivers (or if it does not deliver as promised)? The biggest problem with the 2000/01 budget is that it does not improve the social safety net that can provide a hedge for the poor until Gear delivers. This applies especially to children, the unemployed and the elderly that are reliant on pensions. Targeted poverty spending makes up less than 0.7% of non-interest spending over the medium term. In fact, it is likely that the social safety net will weaken over the three-year budget period. The budget (and other policy documents) provide little by the way of an integrated poverty strategy or expenditure to relieve backlogs. Social spending shows minimal real increases. Over the three-year period, allocations to the child maintenance will decrease to R85 in real terms, as will the real value of the primary school nutrition programme. As regards the unemployed, it is likely that the first jobs provided through growth will be skilled employment in the services sector. Similarly, the majority of the anticipated 35 000 or more jobs shed in public sector restructuring will be unskilled jobs. The poor are likely to be more vulnerable over the budget period.
• What would have been better? What was required in the context of this year's budget was a set of immediate, targeted interventions to marry short-term poverty alleviation with a longer-term, skill intensive growth requirements. For example, greater expenditure on adult basic education and literacy to improve the employability of the least skilled workers. As we have argued elsewhere, given South Africa's resource constraint, any additional resources, over and above our debt and deficit commitments, should be ploughed into poverty relief. It is therefore unfortunate that the efforts of SARS to rake in more revenue than expected (approximately R1.7 bn), has been devoted to a greater than required reduction in our debt and deficit. It would have been preferable to use these resources towards a 3 times bigger increase in social and disability pensions (R60 increase instead of R20) or towards skilling the unemployed.

Additional comments on particular sectors

• Civil Service: The government wage bill poses the largest obstacle to reprioritisation in the national and provincial budgets. It also holds the greatest promise, through the transformation of the public sector, of increases in the efficiency and effectiveness of spending in the social sectors. Budget 2000 offers little in explicit support for this transformation. At present, personnel expenditure represents just under 50% of non-interest spending, declining slightly over the medium term. This does not allow sufficient space for an increase in non-personnel spending. There is also no clear provision in the budget for the inflation plus 1% wage increases as proposed in the Personnel Expenditure Review. These increases form the basis of the new pay for performance remuneration policy. Budget 2000 also makes little allowance for other once-off costs associated with the restructuring of public service.
• Social services: The social services budget over the next three years is unlikely to improve the social safety net. The budgets for health, welfare and education remain roughly constant (in real terms) over the medium term budget period. Unfortunately, housing expenditure will decrease in real terms over this period. Given the potential role of housing in stimulating growth and equity, it is imperative that the delivery obstacles in the ministry are removed. Highly urbanising developing countries are able to spend and deliver on housing budgets of 4-5% of GDP (Double our current housing allocation).
• Security: Expenditure in the security sector as a whole will grow significantly in real terms. Most of this growth is allocated to the Department of Defence (a rise of 21% in real terms). More modest real increases are allocated to justice and prisons. Only police resources stay constant in real terms with a promise to improve the effectiveness and efficiency on current services through integrated projects and social crime prevention.

Copyright ©2000 IDASA