Mini-budget, mighty implications and the wooden spoon

once heard Trevor Manuel say: “Let me take out my wooden spoon and stir.” Finally, I realised where his staff learned to use the phrase. Imitation is, after all, the highest form of flattery. It usually means that someone in the National Treasury is going to raise a controversial issue, with all the confidence in the world. But, when you produce as accessible, logical and strategic a set of documents as provided for in the Medium-Term Budget Policy Statement 2007 (called the mini-budget), you have reason to be confident.

But, what happens if economic growth slows down? Minister Manuel has been raising this prospect. He has over the past few months asked what would happen if commodity prices fell. He has also asked what would happen if inflation rose too quickly. He has done this in a reassuring and subtle manner. In the mini-budget he provides us with an answer.

The government has introduced a structural budget balance. The logic goes something like this: in good times the government must be able to work out what revenue is cyclical (that is, the revenue would not be there in bad times). To do this, it does some econometric calculations — very technical.

The implication of the calculations is that in good times, the government will run a budget surplus — it will not borrow. In bad times, we must assume that the government will raise money through deficit spending. The tactical consideration is that if one does this, spending by the government would remain consistent despite changes in economic conditions. A powerful argument, as it means that spending on the poor will remain consistent. And, we can safely say we will not run the risk of a debt trap.

But consider a different reality. In good times, the government does not increase investment in assets for the poor as rapidly as it could, because it runs a surplus. In bad times, it raises the deficit but again must do so cautiously, so rapid improvements in the lives of the poor are not possible. In some senses, we must give consideration to the view that the poor will not benefit as much under the government’s strategy as they would under a more expansionary stance.

But, let us be a little more demanding on ourselves.

Over the past five years, public spending has increased by 9,4% in real terms (after accounting for inflation). Spending per person has increased from about R6 800 in 1995 to R10 560 in 2007, again adjusted for inflationary impacts. In the economic outlook, such robust growth is not possible, but National Treasury is still proposing increases of above 6% in real terms. That is a bit of a dampener after several years of higher increases in the budget, but is still an increase above inflation.

In an earlier article, I argued that the modest gains in poverty reduction are fragile. The fragility of these gains is because we have not achieved an effective redistributive strategy. The reason for the absence of this strategy lies not only with the Treasury, but also with other government departments. It also lies with the Presidency, which should play a stronger coordinating role.

An important feature of the mini-budget is a continued focus on public-service reform. The mini-budget provides the funds to implement better salaries for public-service workers and improve front-line service-delivery performance. But here again, without operational improvements the increased allocation could be meaningless to meeting our developmental challenges. As the unions and government prepare for a series of negotiations around public-service transformation, they must find ways to sustain performance and productivity.

The central missing link in our development strategy is that despite the government providing the “fundamentals”, we have not seen a private-sector response. Government and public corporations have ramped up fixed investment in infrastructure and in other areas. They have done this to play a role as a leader and catalyse private-sector investment. Yet, we have not seen significant private-sector investment that would absorb people into jobs.

In “development states”, a key feature of success is that the government provides the framework, but the quid pro quo from the private sector is that it employs a nation — and I say that without any sense of drama. I am certain government strategists must be thinking how they can catalyse such a response. But, what happens if we do not have such a response?

The National Treasury decision on a structural balanced budget is a brave one. But, for this decision to work for the poor, it requires both a stronger redistributive stance from the government and pro-poor economic growth. If this does not happen, we will be giving future generations a prize — the proverbial wooden spoon.

This article first appeared on the Thought Leader group blog hosted by the Mail and Guardian.