Tuesday, September 22, 2020

Gaolatlhe and Manuel?s budgets: whose is bigger?

The Budgets

This article is intended to draw a comparison between the 2007 Budget Speeches by Finance Ministers Baledzi Gaolatlhe and Trevor Manuel. I look at any significant measures that are proposed to stimulate the supply-side of the two economies, boost confidence, bring down the cost of doing business in the two countries and stimulate investment in the region. I also look at why the increase in government spending is more likely to lead to sustainable economic growth in South Africa than in Botswana. I am also highlighting the fact that due to our trade relationship with South Africa, through SACU, economic achievements Botswana has made over the past 40 years have benefited South Africa significantly.

With the discovery of diamonds in the late 1960s, Botswana has achieved one of the highest growth rates in the world, averaging 9 percent between 1966 and 2006 ? almost four times the African average. Botswana is now classified as an upper middle-income country with approximately 7000 kilometers of tarred roads, a GDP per capita in 2006 of approximately US$3000, almost universal free education, 68 percent adult literacy, four doctors per thousand populations, and infant mortality of approximately 58 per 1000 live births. Botswana was awarded the highest sovereign credit rating in Africa by both Moody?s and Standard and Poor?s in 2006.

In spite of these miraculous achievements, the Economy of Botswana is still very much influenced by the South African economy. Botswana continues to import about 80 percent of goods (excluding services) from South Africa while we only export around 7 percent of goods to South Africa. This trade surplus enjoyed by RSA against Botswana could mean the latter is not able to export due to restrictions and resistance by RSA firms etc; or that South Africa uses SACU agreement to dump finished goods into Botswana market and thus stifling the growth of domestic industries. Yes some may argue that SACU revenues compensate Botswana for this, the question is at what cost.

In his budget presentation on the February 5, 2007, Minister of Finance, Gaolatlhe, stated that the major objective of this government ?is to set the economy on a sustainable path for Botswana?s future prosperity, and thereby ensure that the Vision 2016 objectives and the UN Millennium Development Goals are achieved?. The Minister reported that the Gross Domestic Product (in current prices) was P57.1bn in 2005/06. Revenues for 2007/08 are estimated at 27bn with SACU revenues accounting for 27 percent of the total. Total expenditure is estimated at P27bn for the same period. Real GDP averaged 9 percent between 1966 and 2006.
On the other hand, South African Finance Minister Mr. Trevor Manuel presented his 2007 Budget on Wednesday 22nd 2007; and with R29.5bn in extra tax revenue flowing into state coffers this year, the Minister has been able to allocate an additional R89.5bn to government spending over the next three years. Altogether, spending of R534bn has been forecast for 2007-08, with education, health, safety and security and infrastructure among the top priorities. The revenue estimates for 2007/08 are R545bn. He plans to spend R2-trillion in the next three years.

According to Manuel, the 2007 Budget strives to accelerate economic growth and work opportunities, modernize the public services and infrastructure and fight poverty and inequality. The theme of the Budget is ?human life has equal worth?? The Minister challenged the nation to ensure that enough is done to empower all South Africans to reach their true potential. South Africa?s economy continued to expand at a robust pace in 2006, generating new jobs, broadening the consumer base and providing impetus for rapid growth in investment. Economic growth of 4.8 percent is projected in 2007, down slightly from an estimated 4.9 percent achieved in 2006. The expansion is expected to strengthen over the medium term as exports increase and the tempo of investment spending rises. Growth is projected to reach 5.1 percent in 2008 and 5.4 percent in 2009.

From the above budget presentations, in per capita terms, that is, as a proportion of the population, it is clear that Botswana Government spends more on the economy than South Africa. South Africa?s proposed Total Expenditure per Capita for 2007 is R534bn/45 million people = R11, 867; whilst Gaolatlhe proposes to spend a total of around P27bn (which at exchange rate of P1=R1.15 is R31bn) which translates into R31bn/1.7 million people = R18, 235. Clearly in per capita terms, Botswana?s budget is by far larger than that of South Africa; and most probably the largest in Sub-Saharan Africa.

This clearly says that if the Economic structure is such that it would be able to absorb and retain such an infusion into the economy, Botswana should be in a position to experience a higher growth rate, lower rates of inflation and interest than South Africa. The question is: why is South Africa able to create more per capita job opportunities than Botswana? Why does South Africa?s economy continue to diversify whilst Botswana?s diversification strategies are clearly not working? Why is it that despite the high government expenditures over the years, Botswana is not able to translate all such investments into sustainable economic growth in non-traditional sectors?

It is a fact that a rise in Government spending, through a multiplier effect, should result in a more than proportionate rise in the GDP. But the extent of the impact of government spending overly depends on how much of such spending is retained in the economy and how much leaks. In the case of Botswana, the chances are much of the expenditure leaks out of the system; thus we do not find continued government spending spheres translating into economic diversification and sustained economic growth attributable to non-mineral sectors. Much of the leakage goes to South Africa in the form of payment for 80 percent of imports that we consume in this country. Even a large part of the recurrent expenditure benefits South Africa more. A teacher who gets a salary at the end of the month is most likely to spend that on finished South African goods such as tomatoes at Shoprite in Botswana. Much of the materials needed to refurbish Government property in any given year is likely to come from South Africa. On the other hand, South Africa is likely to experience sustained growth in their economy from the R534bn Government expenditure because a significant amount of this expenditure would circulate in the economy. The inputs used for Government projects are likely to be local; and where there are no local companies to supply the needed materials, there is a deliberate policy to ensure that a foreign company providing such materials sets up a subsidiary in South Africa for value addition. That is, South Africa ensures that they participate in the supply chain into their market, especially where government procurement is concerned.

It is a fact that high import duties in SACU mainly benefit RSA firms and industries which are not necessarily competitive, and examples are textiles, clothing, motor vehicles, etc all of which are dominated by RSA. Botswana spends huge sums on equipment bought in part from South Africa and yet there is limited competition. It is for this very reason that South Africa is reluctant to have SACU members develop an integrated Competition Policy. South Africa knows very well that it engages in unfair trade practices in the SACU region, hence its reluctance to have an integrated competition policy. South Africa accounts for 51 percent of foreign direct investment in Botswana. However, such FDI does not add much value to the economy of Botswana, as much of it represents distribution of goods and services processed in South Africa.
Let me hasten to add that consuming South African goods is not necessarily a bad thing. The problem is when we allow South African companies to turn Botswana into a distribution hub for their goods into Botswana. We should import from South Africa, if we don?t have capacity to do domestically, but where South African companies do not want to buy from domestic producers (regardless of quality) then there is a problem. This situation, where we can spend millions on imported intermediate goods without insisting on domestic value addition continues to undo our efforts to diversify our economy. This explains why the South African budget is more likely to spur growth in South Africa than our budget. In fact, the Botswana budget, as always, continues to create more jobs for South Africans in South Africa and those who head South African companies in Botswana than it would for Botswana.

Implementation Issues and Poverty Alleviation Strategies

The Botswana Budget points to the fact that Botswana still faces a number of development challenges. In Botswana, we are currently involved in an intense debate about our growth strategy. The country still faces high levels of poverty and unemployment. At least 23 percent of the people from an estimated population of about 1, 7 million spend less than US $ 1 per day and as such these people are considered poor. Most of the poor households live in rural areas with a significant number of female-headed families. However, this far much better than South Africa, where an estimated 40 percent of the population leaves below the poverty datum line; and for Botswana, government has over the years developed social safety nets to fight poverty; and this has culminated in the development of the National Poverty Reduction Strategy to monitor and evaluate poverty programmes. Besides poverty, unemployment, especially among the youth, is very high. About 20 percent of the country?s labour force is unemployed with the youth (under 25 years) accounting for the majority. Limited sustainable income and employment opportunities in both the formal and informal sectors contribute to high levels of poverty and unemployment. However, the decision by government to amend the Income Tax (Training) Regulations will go a long way in encouraging the private sector to provide job opportunities to the youth; and that will help improve skills and enhance implementation process and economic growth.

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