SA : Balancing poverty relief with useful investment
Neva Makgetla, Business Day, 20 February 2008
EVERY budget day, whole forests expire so that we can read the detail on changes in the tax codes. Yet only about a quarter of all employed people earn enough to pay income tax.
In contrast, government spending affects everyone. A review of long-term trends points to important shifts, though they rarely form part of the annual budget frenzy. For one thing, spending on government services has grown rapidly - about 14% a year since 2003. For another, spending patterns point to lingering contradictions, with the government's commitment to a developmental state focused on creating a more dynamic and inclusive economy.
Rapid growth in government services largely reflects a cut in debt payments. The state spent 10% of the budget on interest payments last year, compared with 25% a decade ago. That is a saving of about R50bn on this year's budget - most of which would have gone to the relatively small group that can afford to invest in government bonds.
The decline in debt costs is largely due to lower interest rates, combined with reductions in government debt. In 1997, the prime interest rate was 19%. By 2005, it had fallen to 10,5%, and today is about 14,5%.
A more relaxed fiscal policy from 2000 plus economic growth also permitted rising expenditure. In 1997, government spending accounted for 28% of gross domestic product . It fell to 26% in 2000, then climbed back to 29% last year. With more rapid economic growth, that increase added another R50bn to total spending.
While state spending has grown rapidly, it remains low relative to social and economic needs. Since 1994, the government has had to extend services to all while seeking to ensure a more inclusive economy and maintain economic infrastructure. It's no wonder services are often stretched , funding for maintenance remains inadequate, and important but less urgent areas fall behind.
Social security now absorbs 18% of government expenditure, compared with 12% a decade ago. About 20% of households depend primarily on social grants, twice as many as a decade ago. But most households get only the child grant, which at R200 a month is not enough to lift a household out of poverty. Only the old-age and disability pensions, at R870 a month, approach the poverty line.
Government spending on transport, energy and water also surged in the past few years, rising from 6% of the budget in 2000 to almost 10% today. In the past four years, spending in these areas climbed almost 20% a year, reflecting the renewed commitment to government investment.
In contrast, the share of spending on education has dropped steadily over the past decade, from 27% to 21%. Education budgets grew in real terms by about 3% a year between 1997 and 2003, then accelerated to 10% a year. The relatively slow increase in spending hit hardest at tertiary education, with a 25% drop in expenditure per student over the past decade. But very low levels of spending on African schools until 1994 mean that they still face backlogs.
Another area of slow growth was incentives for manufacturing, mining and construction, which last year absorbed just R3,5bn, less than 1% of the budget. In real terms, spending was lower than in 1997. Tax subsidies, especially incentives for the vehicle sector, were worth far more than the on-budget incentives.
This year's budget is expected to more than double spending in this area., in line with the renewed commitment to industrial policy.
Spending on policing, prisons and the courts dropped from 12,5% in 1997 to 11,5% last year , although in real terms these budgets doubled compared to 1997. These figures exclude spending on metro police.
In short, the growth in government spending has ensured improvements in almost every government service. But the backlogs left by apartheid, combined with unusually high unemployment , mean the government faces competing demands. The challenge is to balance spending on direct poverty relief against the longer-term need to invest in transforming the economy to provide more sustainable opportunities for historically marginalised economies.
