SUBMISSION OF THE PEOPLES BUDGET COALITION TO THE STANDING COMMITTEE AND SELECT COMMITTEE ON FINANCE ON THE MEDIUM TERM BUDGET POLICY STATEMENT 2010
10 November 2010
People’s Budget Coalition
Budget 2010
The People’s Budget Campaign (PBC) is a civil society coalition comprising the Congress of South African Trade Unions (COSATU), the South African Council of Churches (SACC) and the South African Non-Governmental Organisation Coalition (SANGOCO). This coalition has for the past ten years tabled proposals on the budget and a participatory budget process. In addition, it has played a significant role in monitoring and advocating that real expenditure by government does not decline particularly on key areas of social spending. We have also been active in proposing alternatives in relation to more progressive taxation models and revenue generation, with the emphasis being on shifting the burden away from the poor and to address inequalities and ensure meaningful redistribution
1. The Continuing Crisis of Poverty, Inequality and Unemployment
1.1South Africa continues to be mired in the crises of unemployment, poverty, and inequality. The 2010 MTBPS seems to support the Polokwane resolution on economic transformation by stating that “employment has to be the focus of South Africa’s new growth path”[See MTBPS 2010, p.1]. The MTBPS does not, however, assert that “employment has to be the focus of South Africa’s macroeconomic policy”. We should remind ourselves what the 2009 Manifesto Policy Framework of the ANC said:
“…the creation and retention of decent work and sustainable livelihoods will be the primary focus of all economic policies of the ANC government…Our fiscal and monetary policy mandates including interest rates and exchange rates need to take into account employment considerations, economic growth and other developmental imperatives” [ANC Manifesto Policy Framework, 2009].
1.2 But what are these developmental imperatives? Essentially these imperatives are industrial transformation and diversification which in the RDP is referred to as “building the economy”, in order to develop the capacity of the economy to create employment, support rural development, meet basic needs (food, water, electricity, ICT, transport, health, education, housing), add-value to sustain economic growth in the long-term, and to address the balance of payment.
1.3In other words, the new growth path must be supported by policies that make the creation and retention of decent work together with the eradication of poverty and inequality the primary focus. The MTBPS deliberately ignores the continuing macroeconomic policy mandate that is contained in the 2009 Manifesto Policy Framework and instead seeks to locate policy debate only around issues of ownership and control of the economy, health and education [See MTBPS 2010, p.1]. Whilst these issues are important, equally important is the need for our fiscal and monetary policy mandates to take into account employment considerations and make decent work the primary focus.
1.4This MTBPS ignores the 2009 Manifesto Policy Framework of the ANCin a number of ways:
- The fiscal stance that it takes is completely at odds with job-creation.
- The macro-economic interventions that it proposes are grossly inadequate in response to the continuing job losses
- Its approach to financial markets is out of line compared to comparative economies
- It lacks a political-economic analysis of the global power dynamics, and thereby makes South Africa one of those countries that will bear the brunt of adjustment in resolving the continuing global crisis
1.5Our view is that this MTBPS is the same as the ones before the Polokwane Conference, and we therefore reject it.The only cosmetic changes are reference to the now-fashionable notion of a growth path, and sloganeering about making employment the primary focus, without actually changing underlying framework that underpins the budgeting process. These elements in the MTBPS are what they are: cosmetic and they are not reflected in the underlying policy framework.
1.6This 2010 MTBPS claims that it “outlines the macroeconomic, fiscal and public-expenditure dimensions of the proposed development path” [See MTBPS 2010, p.2]. The macroeconomic dimensions outlined in the 2010 MTBPS are old and not geared towards making employment the primary focus. Accordingly, the proposed development path will not actually be new, as long as it is supported by the old macroeconomic framework.The new growth path document will look like an ASGISA—containing no policy shifts, trapped within orthodox neo-liberal macro-economic parameters and will therefore fail to alter the development trajectory of our country.
2. Our Analysis of the Global Economic Situation
2.1Our basic argument is that the MTBPS 2010 does not advance the long-term interests of South Africa and countries of the South, within the context of global balance of economic power. It deliberately prescribes very weak policy interventions that strengthen the power of multi-nationals and financial speculators operating in our country to move funds in and out of our borders and hence region, at will. This effectively surrenders our autonomy to make policy in response to our domestic challenges, and places the burden of adjustment in the global economic crisis on the shoulders of the working class and the poor, industrialists and farmers.
2.2The global economic crisis continues, despite fragile recovery in advanced economies. The big political-economic question that confronts policy-makers is: Who should bear the brunt of the global recovery? This question is approached at two levels. Within advanced economies, a tussle has begun between the working class and business, for example in France and Greece. At the global level countries of the South, emerging markets and developing economies, face the prospect of bearing the brunt of global adjustment.
2.3The Euro-area is projected to grow by a mere 1.65% in 2011. The unemployment rate is projected to be at 10.05% and the budget deficit as a proportion of GDP is expected to be 4.65%. These developments are supported by moves towards fiscal consolidation, as pronounced by the G20 summits, and are aimed at arresting fiscal deficits and stabilizing public sector debt levels. In the Euro-area, public sector debt is expected to be 99% of GDP in 2011.
2.4The slow growth in the Euro-area and the projected double-digit unemployment rate poses a threat to the sustainability of public debt. Interest rates are expected to remain low, despite calls by some institutions, for example the ECB, that the UK must lead the process of monetary tightening. The low interest rates in advanced economies are coupled with the prospect of unemployment peaking in 2011 and the projected low inflation rates. In addition, low interest rates are required to support fiscal consolidation and to stabilize public sector debt.
2.5It is however becoming clearer that calls for fiscal consolidationby the G20 are means to introduce fiscal austerity measures in which public sector expenditure on social services are to be cut. These are means to shift the burden of global adjustment to the working class and a direct attack on the social wage. In France, austerity measures have been met with massive social protests. Monetary authorities in advanced economies are under pressure, especially from financial capital, to raise interest rates in order to support the process of financial capital accumulation. Therefore, part of the urgency in implementing fiscal austerity measures is driven by the need to accommodate the demands for financial sector accumulation.
2.6BRIC countries are however expected to grow at a higher rate and to maintain single-digit unemployment rates, despite the on-going crisis. South Korea for example is expected to grow by 4.6% and to maintain an unemployment rate of 3.3%. India is expected to grow at 8.5%, to run a budget deficit of 9.5%, a small current account deficit of 2.95%. A key feature of the BRIC countries is that they refuse to be used by global powers to bear the brunt of global adjustment.
2.7This refusal by BRIC countries to bear the brunt of global adjustment and their assertion of national policy autonomy takes the form of targeting moderate current account deficits, if not surpluses. India for example, has made a choice of embarking on fiscal expansion in order to maintain its growth rate, and moderately runs a current account deficit by putting in place measures to limit exchange rate appreciation, and to ensure job-protection, through its state-owned banking system, by a sufficient supply of credit to productive sectors. Brazil is imposing taxes on speculative capital inflows and thereby raises revenues to finance long-term development. South Korea has a battery of restrictions and taxes and is considering new ways of taking advantage of capital inflows. All the BRIC countries are actively engaged in aggressive multi-instrument interventions to limit exchange rate appreciation.
Table 1: Projections of Selected Macroeconomic Variables For 2011
Growth Rate / Unemployment Rate / Current Account / Budget Deficit / Debt-GDP Ratio / Inflation RateEuro-Area / IMF / 1.5 / 10 / 0.5 / -3.6 / 99.3 / 1.5
OECD / 1.8 / 10.1 / 0.7 / -5.7 / 1
Average / 1.65 / 10.05 / 0.6 / -4.65 / 99.3 / 1.25
U.S. / IMF / 2.3 / 9.6 / -2.6 / -7.1 / 87 / 1
OECD / 3.2 / 8.9 / -0.4 / -8.9 / 1.1
Average / 2.75 / 9.25 / -1.5 / -8 / 87 / 1.05
South Korea / IMF / 4.5 / 3.3 / 2.9 / 3.4
OECD / 4.7 / 3.3 / 1.6 / 0.8 / 3.2
Average / 4.6 / 3.3 / 2.25 / 0.8 / 3.3
Malaysia / IMF / 5.3 / 3.2 / 13.8 / 2.1
OECD / … / … / … / … / … / …
Average / 5.3 / 3.2 / 13.8 / 2.1
Brazil / IMF / 4.1 / 7.5 / -3 / 4.6
OECD / 5 / … / -2.6 / -0.9 / 5
Average / 4.55 / 7.5 / -2.8 / -0.9 / 4.8
Russia / IMF / 4.3 / 7.3 / 3.7 / 7.4
OECD / 5.1 / … / 5.3 / -2.2 / 7.1
Average / 4.7 / 7.3 / 4.5 / -2.2 / 7.25
India / IMF / 8.4 / … / -3.1 / 6.7
OECD / 8.5 / … / -2.8 / -9.5 / 6.3
Average / 8.45 / -2.95 / -9.5 / 6.5
China / IMF / 9.6 / 4 / 5.1 / 2.7
OECD / 9.7 / … / 3.4 / 1.6 / 2.5
Average / 9.65 / 4 / 4.25 / 1.6 / 2.6
South Africa / IMF / 3.5 / 24.4 / -5.8 / 5.8
OECD / 5 / 24 / -5.5 / -4.7 / 5.2
SA Treasury / 3.2 / … / -5.3 / 6.1
Average / 3.9 / 24.2 / -5.53 / -4.7 / 5.7
2.8In this context, South Africa has relied more on market forces to determine the level of the exchange rate. This has put it in the position of being one of those countries that bear the brunt of global adjustment. Steeped in orthodox ways of thinking and paralyzed by baseless caution, policymakers in South Africa have allowed massive appreciation of the Rand from as high as R7.80 to as low as R6.95, in the context of job losses. The Rand exchange rate has appreciated by almost 10% during 2010, thereby destroying the competitiveness of local industries.
2.9In this context either national income has to adjust in order to correct to the current account, which takes the form of slow economic growth, or the current account balloons and continues to be financed by short-term capital flows, which once more traps the economy in the unsustainable growth path of the past 16 years. The output adjustment and the resultant financing of domestic expenditure by short-term capital inflows has been uncritically acknowledged by the Minister in his Speech on the MTBPS: “The slowdown in our economy since 2008 has contributed to a narrowing of the balance of payments current account deficit from over 7% to an estimated 4.2% this year, which has been comfortably financed by capital inflows” [See, MTBPS Speech, p.12].
2.10 But what does this mean concretely? It means that South African policymakers would rather have unemployment rise by contributing to the economic slowdown, than intervene in financial markets in order to adjust macroeconomic imbalances. South Africa has chosen a path of adjustment through unemployment and the major losers from this policy stance are the working class and industrialists. It is precisely those domestic industries that underpin fast-growing economies that are being hammered by the policies choices that are being adopted, especially the many sub-sectors within manufacturing which are important for long-term economic sustainability and agriculture, which produces food—a key ingredient in any development strategy.
2.11Without a shift in the macro-policy paradigm, South Africa will thus remain an outlier among comparable economies. BRIC countries require low levels of economic growth to maintain low levels of unemployment. On the other hand, South Africa requires high levels of economic growth, the recent figure being 7%, in order to significantly reduce unemployment. However, the starting point for South Africa should not be growth targets. Rather, the starting point should be changing the industrial structure, it should be changing the composition of economic growth and to properly locate the role of the state in job creation, including transformation of the way the education system interfaces with the labour market.
Figure 1: Growth and Unemployment Rate
2.12In the MTBPS 2010 Speech, we learn that we have to go to the G20 in order for us to seek ways in which we can conduct our economic policies. We have to await the President of the Republic to go “seek a common framework for re-shaping the global economy, and addressing the challenge of aligning divergent national interests within a multilateral cooperative vision and a plan of action” [MTBPS Speech 2010, p.9]. The Speech proceeds to state South Africa’s view in the G20, which is that “shared long-term goals and well-sequenced reforms are more likely to succeed than unilateral or protectionist steps” [MTBPS Speech, p.9]. This position has not been discussed with social partners in South Africa.
2.13This naively assumes that the framework of market-led growth which the MTBPS advocates is not linked to thecurrent global economic landscape which endangers the majority of the population, especially in the South. For example, the flow of hot money from the North to the South is a means of forcibly opening up markets for the North, through the appreciation of exchange rates of the South, in order for the North to export their way out of the crisis and to plunge the South into debt. Keeping interest rates high in the South relative to the North and loosening exchange controls, opens the South to be once more an avenue through which global speculative financial capital can resuscitate its accumulation, to the detriment of long-term development of South economies. In the midst of this power play South Africa, unlike BRIC countries, has adopted a thoroughly conservative-liberal approach.
2.14On p.20, the dictates of the G20 on macroeconomic policy and microeconomic reforms are approvingly imposed on South Africa. These dictates form the pillars within which the MTBPS has been formulated. The ideas of “rebalancing” and “fiscal consolidation”, which are borrowed from the IMF and the G20, are uncritically touted to guide policy going forward.It seems as if policymakers fetch for us the policy prescriptions from the G20 meetings and the IMF, whilst we continue to lose industries and jobs.They simply “monitor” what BRIC countries are doing in defense of their national interests, and hope for a global solution in the context of unbalanced power relations. The overall approach of the MTBPS clearly demonstrates the lack of policy autonomy of South Africa in responding to its own situation.
2.15This is what we would expect from a progressive macroeconomic policy:
- An analysis of the distribution of the costs of the recession globally, within countries and between countries
- An analysis of the actions undertaken by our peers, in minimizing or eschewing the brunt of adjustment
- An articulation of South Africa’s stance on the distribution of the costs of the great recession
These four points should underpin the analysis of the global context and to properly locate the South African developments in this context. None of this is undertaken, and so this MTBPS is located within the false assumption that the in the G20 meetings, countries there actually pursue the interests of the global community than their own.
2.16 Lastly, we would like to remind the social partners about the commitments made in the Framework for South Africa’s Response to the International Economic Crisis: “The South African government will ensure full consultation and collaboration with its social partners on the positions it takes in future G-20 Summits and meetings of Finance Ministers, including through briefings and updates to Nedlac and the circulation of position papers. We will ensure that social partners are enabled to participate in the G20 process in whatever ways are practicable. South Africa will also call on the G-20 to ensure much stronger consultation with social partners in its future processes. South Africans also recognise their responsibilities as the only Africans at the G-20 table to ensure much greater collaboration with intuitions such as the AU”. None of this happened.
3. The Macro-Economic Outlook
3.1This year’s budget takes place in the context of a slow and painful global recovery.The insufficient rates of economic growth in advanced economies means that the trade account will operate in a deficit over the next three years. The interest rate differential will also draw in speculative capital inflows, which will put pressure on emerging market exchange rates to appreciate.
3.2This represents an attempt by global economic powers to shift the burden of adjustment to emerging markets and developing countries. As emerging market exchange rates appreciate they suck in imports from advanced economies and struggle to expand their export markets. The massive trade deficits that exchange rate appreciation will generate for countries in the South will constitute the basis for advanced economies to climb out of the crisis. In addition, these deficits will provide an outlet for social pressures that are mounting in advanced economies, as the struggle between the working class and finance capital sharpens over austerity measures read “fiscal consolidation”.
3.3In this context, the prospects for the South African economy remain gloomy, unlike in BRIC economies. In his Foreword to the MTBPS 2010, the Minister of Finance states: “We spire to join this dynamic group of high growth economies [BRIC]”. Yet, the limited use of policy tools, heavy reliance on market-basedadjustment and a strict adherence to the dictates of inflation-targeting and fiscal austerity, the burden of adjustment is likely to be borne by workers through job-losses, industrialists through their firms shutting down and farmers, as they face mounting pressure to sell their products below cost. In terms of major macro-economic variables the following are projected:
- Growth rate: In order to significantly dent the unemployment problem, South Africa is now said to require a 7% growth rate [MTBPS 2010, p.20]. However this target does not address the fundamental question of the composition of economic growth. A growth rate of 3.9% is projected, up from 3.6% that was projected in the February Budget Speech.This is insufficient to create jobs.
In the MTBPS the economy is now projected to be 3.6% for the year 2011/12. This is insufficient to create jobs. We can project that this growth rate will continue to deliver job losses, or the rate of job creation will be less than the growth of the labour force, leading to an increase in the unemployment rate over the next 3 years.