Government to transform the economy

Cape Town - Government plans to transform the economy by expanding growth and job creation, while developing a more effective public service, says Finance Minister Pravin Gordhan.

Presenting his Medium Term Budget Policy Statement in Parliament today, Gordhan said a sound fiscal position has allowed government to sustain public services and to increase spending on investment aimed at raising future growth.

A Gross Domestic Product (GDP) growth of 1.5 percent is forecast for 2010, with a forecast growth of 3.2 percent in 2012.

There are signs that the economy is recovering, said the minister.

While the GDP is expected to decline by 1.9 percent for 2009, South Africa is expected to experience a growth in GDP in the last quarter of this year.

Consumer price inflation has fallen from a peak of 13.6 percent in August last year to 6.4 percent for the same period this year largely as a result of moderating food and oil prices and a stronger rand.

A deficit of 7.6 percent is projected for this financial year, from a deficit of 1 percent last year. Revenue projection is expected to recover over the next three years.

Employment levels fell by 3.4 percent in the first half of this year, with the highest ratio of jobs lost in the agriculture, domestic work and informal sector.

Low levels of public debt have enabled a rapid increase in infrastructure spending, much of it supported by government-guaranteed borrowing by state-owned enterprises.

Government's investment in infrastructure of gross fixed capital formation by the public sector increased from 5.9 percent of the GDP in the second quarter of 2007 to 9.4 percent in the same period in 2009.

The Expanded Public Works Programme has accelerated in drawing more people into employment.

The government has taken various steps to support the recovery including: sustaining public spending and government employment programmes; helping state-owned enterprises to increase their investments; bolstering municipal capital spending through development finance institutions; maintaining expansionary fiscal and monetary policies for only as long as necessary and reinforcing the social-security net.

Yet the country's biggest challenge remains job creation.

Only 42 percent of the population between the 15 and 64-years-old are in some form of employment. In the former homelands only 30 percent of adults have jobs.

This compares unfavourably with fellow emerging economies, Brazil and China where about two thirds of the adult population have work.

The country's labour absorption rate is also lower than Ghana, South Korea, Brazil, China and India.

"If the country does not find a way to resolve this problem, there will be catastrophic implications for social stability and future growth," said Gordhan.

The country also requires a higher productivity and government plans to take steps to raise employment and lower the costs of products to boost competitiveness.

The volatility of the rand has also drawn some attention, because it affects exports. Since 1994 nominal exchange rates have depreciated by 60 percent, making the rand more competitive today than it was 15 years ago.

With this in mind, the government will relax exchange controls to lower the cost of doing business and promote investment.

The inflation rate will be kept in check to ensure that it is not higher than trade partners, as this will lead to a decrease in competitiveness.

Over the next three years government will clamp down on spending, to be conducted in three phases. This is aimed at developing a more effective public service.

Tax revenue has fallen by about 3.2 percent of GDP, with the biggest declines in VAT receipts, company taxes and trade taxes.

To widen the tax base, government is considering improving tax compliance and introducing new taxes - such as environmental levies. - BuaNews