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A Memorable Month
Dr. Cees Bruggemans, Chief Economist, First National Bank
13 February 2006
We are on a tear. It isn't only the prospect of local elections inciting us. Our cocoon of many years standing appears to be finally opening, a new butterfly readying to take wing.
We are leaving transition behind, having entered a period of high performance. With it comes accelerated change, not only the kind engineered by politicians, but spontaneous structural change in response to market forces, rearranging our furniture in fundamental ways.
There is much more income in ordinary hands. It shows up in changing lifestyles. A rapid march is underway through the LSMs (Living Standard Measure), seeing 800 000 people drop out of the lowest LSM (1 to 3) in a year, with a million entering the higher LSMs. Steady employment gains are finally arresting the onward march of unemployment, indeed starting to reverse the tide.
Expanding metropoles are increasingly congested. Consumer prosperity is spreading furiously, with the new 'individualism' defined by Tuscan houses, enormous cars, snappy cell phones and brand name clothes.
The SARB is keeping a steady course, having allowed interest rates to shadow inflation lower, greatly improving the financial leverage of households.
The country has benefited from fair global winds bringing commodity, capital inflow and financial deal booms. The Rand has firmed, inflation suppressed, spending and output taken wing, in a manner last seen in the 1960s.
Lookouts are daily scanning the world, dreading the sighting of approaching storms reversing these balmy conditions. But so far no sign, though oil, flu and frothy commodities are worrisome.
Meanwhile global imbalances and Asia's growth aggression continue to support us via commodities and capital inflows. Their likely evolution remains uncertain. It could carry on for longer than generally believed, not a function of luck or froth but of structure.
Against this backdrop President Mbeki opened Parliament, launching his election campaign. Emotional contrasts of an unfair past with today's spreading prosperity easily projects into the future, identifying what's left undone and needing attention.
Local government. Infrastructure. Human capital. Land reform. Housing. Corruption. All got a mention, with ambitions penciled in. We remain a work in progress, but the contours are shaping nicely.
There was also the healthy realization that we remain exposed to the vagaries of an unpredictable world, which as easily showers benefits on us, as takes them away. Though spoken as an afterthought, it hints at continuing policy conservatism as we heroically build our future.
This week, after an admirable ten years in the saddle, during which his stature and popularity have only grown, the Minister of Finance will share with us his unprecedented pot of gold, this year truly overflowing.
The kitty already holds R60 billion in cash. This hoard is expanding at R30 to R50 billion ANNUALLY, reflecting good employment growth, income gains, household spending, housing boom, great company profit surges, and SARS eagerness to outperform all given targets.
Windfalls gained in good years should perhaps be salted away, like good ants do in preparation for winter, rather than to be consumed in locust fashion.
It begs the question what is cyclical, and probably not sustainable, and what is firmly structural.
It is not as if the Minister has been starving the country of public spending. Government spending has steadily increased its share of an already fast expanding country cake.
Poor service delivery is due to a lack of organizational capacity. Money won't necessarily correct this in the short term. Only growing people in the long term will.
It leaves the Minister with enormous choice as to how to use his rich windfall. With politics firmly in focus, there will be more spending, addressing remaining bottlenecks and expanding welfare support, winning general approval.
Tax wise there is scope for lower corporate taxes in the name of efficiency, with rate cuts and reduction (abolition) of secondary tax on companies. The revenue loss would be minimal, given the tax overruns and strong performing economy.
As in foregoing years, the main political emphasis will be on income tax relief for the upcoming middle class without giving away too much tax base. Maximum political bang for minimum financial outlay. Only careful comparison with last year should tell us how much relief the Minister really grants.
Deep fiscal conservatism could remain a feature. Underestimating revenue, creating scope for financing infrastructure, limiting stimulation of an already hot economy, and saving part of the windfall for when rainy days will come again.
The ultimate reflection of turning a new leaf concerns exchange control. With the emergency long gone, national finances restored, good times rolling, tax administration better anchored and ambitious to integrate with the modern world, the need for exchange control is over.
Scrap it on individuals, prudentially keeping it on institutions. As to companies, convincingly explain why it remains needed or free them as well, with the country getting buried under incoming capital and the Rand needlessly overvalued.
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