manuel spending the billions
29 October 2007

Finance Minister Trevor Manuel will on Tuesday present his plan to manage disappointing growth and stubbornly high inflation without sacrificing the government's massive national infrastructure development plan or his commitment to fight poverty.
In addition to revised expenditure, growth and inflation forecasts, Manuel's three-year Medium Term Budget Policy Statement will for the first time present a spending outline for the fiscal years to March 2011.
It will have to account for a more volatile global economic outlook now troubled by fears of a US recession and for an unexpected escalation in the cost of imported components for the infrastructure programme, currently valued at R416-billion over three years.

Provisional revenue statistics for the first five months to August of the current financial year show personal tax receipts rising at twice the speed of last year, but VAT and company tax income growing at only half last year's pace, making revenue forecasts uncertain.
Global inflation is growing and domestic prices, which in February were expected to stay within the CPIX target band, have slipped their leash and show no sign of coming to heel before mid-2008 at the earliest.
A traditional pre-Budget lockdown prevented Treasury officials from speaking to media or analysts even on background this week, leaving analysts speculating about the numbers and trends Manuel will present.
One thing economists will be looking for is whether he will budget for small surpluses over the next three years, as advocated by the so-called Harvard Group of Treasury advisers, or dip into the nation's savings and counter the Reserve Bank's tightened monetary policy with a return to modest deficits.

Another is whether he will let Central Bank Governor Tito Mboweni off the hook and revise the six percent to three percent inflation target to accommodate offshore food and fuel cost effects on domestic prices and reduce pressure for further growth-inhibiting interest rate hikes.
PanAfrican Capital Holdings chief Iraj Abedian said imported inflation was putting Mboweni under unreasonable pressure and damaging the credibility of the Reserve Bank.
"We've got to manage the inflation band in response to the global environment. It has to be raised to seven percent or 7.5 percent," Abedian said.
But economists are divided on the issue, with most saying it would be wrong to change the target when it is under pressure. Others, including Brait economist Colen Garrow, favour revision.

Manuel typically uses the medium-term outlook to announce new policy directions, but the big new number on Tuesday will be his expenditure outlook for the third year of the forecast period. Most analysts expect him to continue the aggressive infrastructure expansion programme, but they differ on how it will be funded.
The February budget estimate for the year to March 2010 was R650-billion, including R151-billion on infrastructure ranging from hospitals to airports and from roads to locomotives. The new figure for the year to 2011 should rise well above R720-billion with at least R165-billion for infrastructure.
The current estimates do not yet include the cost of the proposed mandatory universal pension scheme, which will include a wage subsidy to help low-income earners cope with the additional monthly outlay. Nor do they include the cost — estimated at up to R100-billion by 2025 — of the ambitious nuclear energy programme adopted by the Cabinet at its July lekgotla.
Both those programmes should kick in during the financial year that also includes the 2010 World Cup.

In addition, the state-owned broadband Infraco company will need at least R4.5-billion to fund a proposed undersea cable to South America and Europe — a crucial part of plans to slash international internet and telephony costs — and Sentech, the state-owned wireless company, has asked for R2.5-billion to pay for a wireless backbone needed in time for the World Cup .
Economists unanimously expect Manuel to lower the Treasury's growth forecast for next year from the 5.1 percent of gross domestic product that he predicted in February and to raise the outlook for CPIX inflation, which excludes mortgage costs, from February's 4.7 percent average for 2008 to a figure nearer to six percent.
"We expect that economic growth will slow as a result of the higher interest rates and the global slowdown, which would also have an impact on the surplus," said George Glynos of Econometrix. "We will probably be revising our growth forecast down by 0.3 percent to 0.5 percent, which is reasonably significant."
Hugo Pienaar of the Bureau for Economic Research said he expected Manuel to drop the 2008 growth forecast towards 4.5 percent, but not to the four percent level forecast this week by Moody's Investor Services.

"The international economy is not looking so great, so they will probably have to revise the growth forecast down a bit for next year. We're looking at 4.7 percent, the IMF (International Monetary Fund) has revised its estimate down to 4.2 percent and, of course, Moody's has come out at four percent," he said.
Sanlam's Jac Laubscher said Manuel could drop the forecast for next year's growth to around 4.25 percent on the back of the Reserve Bank's seven interest-rate hikes totalling 3.5 percentage points since June last year.
"The economic outlook is substantially different to when he presented the Budget in February. Instead of an accelerating rate of growth over the next three years, we're going to see a deceleration in the rate," he said.
Standard Bank economist Goolam Ballim expects Manuel to maintain his commitment to poverty relief, but without stimulating consumption. He cautions against overreaction to the reduced growth forecast.
"We're growing at a declining pace, but off a very high base," he said.

"The government will want to show some sensitivity to the pain being felt by ordinary people, but that is likely to be in the form of non-cash benefits like disbursements to education and health. I expect a diminished consumption bias in the new MTBPS and a stronger emphasis on infrastructure that has a bigger multiplier effect on growth," Ballim said.
Economists, said Manuel, would have to factor in the increased cost of the infrastructure programme as a result of global competition for limited supplies of building materials, including cement and steel, as well as scarce engineering skills.
"There is no room to expand the revenue projection path — he is more likely to trim it," said Laubscher.
"He is going to have to rethink the infrastructure costs," he said.
Sunday Times

Brendan Boyle, www.iafrica.com