South Africa Economy

The past decade has seen a growing South African economy and the 2006/07 Budget Speech drew on the fact that South Africa is anticipated to experience an economic growth closing in on a 6% target and inflation remaining around 4.5%. With a broader tax base the economy has realized an additional R41.2 billion revenue collection. This has given the Minister greater flexibility to utilize these additional funds to uplift the poor even further than in previous budgets. To alleviate poverty has been the Government’s priority. Spending on social and welfare grants has been the biggest benefactor since 2001 going up roughly 5.5% in 2006/2007. This proves that the state is serious in uplifting the poor, with R16.2 million allocated to housing and community development. Sanitation, water services and electrification have been prioritized. R23 billion will be spent on improving informal settlements.

Due to this extra revenue collection, the South African budget deficit has also fallen from an expected “3.1% to an actual of 0.5% of GDP” (ABSA ECONOTRENDS, 2006). This will allow and maintain the anticipated future economic growth.

Economists use a Production Possibility Curve, a graph to depict the sacrifice between two products produced. It indicates an opportunity cost, the amount you lose in investing in one option compared to choosing another. The Gautrain Project represents primarily as a capital intensive project, having an expected R20 billion pumped into the project. This indicates on the Production Possibility Curve an investment in more capital than consumer goods. The opportunity cost represented here is that of the funds utilized for the project which could have been used for more pressing consumer needs such as housing. However on the other spectrum one has to consider the anticipated economic spin-offs this project will create. It will move 300 000 people on a daily basis thus reducing road traffic, reducing road servicing and maintenance and most importantly saving time for the commuters. Secondly it will create 100 000 much deserved job opportunities. Therefore it is foreseen that this project will greatly enhance the GDP of the Province and the Country.

Relating to the South African Production Possibility Curve, Trevor Manuel’s aim is to firstly increase the efficiency of our current economic position and to ensure that future growth is maximized by concentrating currently more on capital products in the Production Possibility Curve. By enhancing and maximizing current position he will allow for the Production Possibility Curve to shift favorably outwards. Graph A Production Possibility Curve indicating Graph B Production Possibility Curve indicating future increased efficiency from A to B expected outward shift of curve

To achieve an increased desired efficiency from our current position A, Manuel has put in place the following policies to achieve productive efficiency by better utilizing resources such as people skills, education and employment opportunity. The 2010 World Cup stands as a further incentive for Government to invest more into infrastructure as seen by a total of R5 billion for World Cup infrastructure. Grant Thornton consultants, predicts that R21.3 billion will be pumped into the South African economy and 159 000 new jobs will be created. Utilizing all of these resources efficiently results in a movement from current position A, of graph A, to point B.

In achieving maximized efficiency the economy’s present position in prioritizing goods for the future, a favorable outward shift of the curve will occur, enhancing the economic growth further. Graph B illustrates how Manuel’s present choice in investing in capital more than consumer will result in a greater shift of the curve for the future. Resources have been freed to allow for a more flexible and efficient use.

The attractive and stable interest rates in South Africa will encourage both local and foreign investments and encourage further exports. The generous tax concessions to individuals and companies promote investments in new business. Manuel said, “Investment was anticipated to grow between 8% and 10% a year while claiming that about 1500 new jobs were now created “every working day”.” (DAILY NEWS, 2006).Large enterprises would be encouraged to invest in capital equipment which will result in further enhancing employment and adding to the GDP and impacting on the Production Possibility Curve. The significant increase from R6 million to R14 million to qualify as a small business will have a positive impact for people wishing to invest in this sector of the economy, as it had been successful in China. This has prompted our Government to model their success. More funds are being made available for skills development to create a more effective and productive workforce.

This year’s budget highlights its main priority, being future growth, by contributing more funds for service delivery, infrastructure, employment, and education receiving the biggest slice of R92.1 billion, which is aimed primarily for the enhancement and development of the South African public. The R32 billion on local transport, rail and port infrastructure will create employment and therefore further reduce our unemployment rate.

Overall the 2006/2007 Budget has been hailed as the best budget in the last forty years. Minister Manuel has to be commended for providing a budget that is holistic to all sectors of the economy. Hopefully Manuel finds himself locked in a lift again and come out with an even better budget next year.

REFERENCE

1. Absa EconoTrends (2006). “National Budget 2006 Highlights & Commentary.” Available online: http://www.finforum.co.za/absa
2. Daily News (2006). “Boom Budget.” Available online: http://www.dailynews.co.za/index.php?fSectionId=499&fArticleId=3114534