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The longer infrastructure lags, the more costly it gets

Published Apr 7, 2011

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The Budget delivered on February 23 for the next three years was more expansionary, had a greater focus on income redistribution and showed less fiscal conservatism than usual.

In particular, it is expected that the budget deficit will fall from 5.3 percent of gross domestic product (GDP) in 2010/11, to 3.2 percent of GDP in 2013/14, as growth strengthens and the government’s counter-cyclical spending comes to an end, restoring fiscal rectitude.

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However, what the Budget actually delivered was no reduction in the deficit (between revenue and spending and including interest payments on debt) from the 2010/11 level until 2013/14.

As a percentage of GDP, the deficit is projected to remain at 2010/11’s 5.3 percent of GDP in 2011/12, despite much stronger GDP growth projections of 3.4 percent and 4.1 percent for 2011 and 2012, versus 2010’s 2.8 percent year-on-year growth. In other words, the actual rand value of the budget deficit is set to rise significantly, to R155 billion in 2011/12 from R142bn in 2010/11, and stay at a similar level in 2012/13.

The markets were expecting a fall in the deficit instead, to R134.2bn in 2011/12 and a further marked decline to R127.4bn in 2012/13. The rise in the deficit (and subsequent slower-than-expected fall) is due in the main to an additional R94bn in expenditure between 2011/12 and 2013/14.

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This money will be spent on social services, specifically housing, social security benefits, education and health care, but will also be used to increase the wages (and numbers) of civil servants and includes a R10.1bn allocation for a job creation fund. The strong welfare focus is not seen as a long-term policy, but rather one that is a necessary part of the development state until unemployed or under-employed individuals can become part of the economic net.

Just more than R10bn of the R94bn additional allocation is earmarked for public transport, but the monies allocated by the fiscus to transport in general remain well below the amount estimated necessary to fund the expansion of the country’s logistics network. South Africa has been unable to take full advantage of the commodities boom because our transport system cannot cope with the greater demand for our goods.

This is even in evidence on a provincial level, with severe congestion experienced in the major urban areas, as the expansion and maintenance of road networks has not kept pace with the rapid rise in vehicle ownership and economic activity. The transport network, and infrastructure in general, is proving largely inadequate for the needs of both a growing economy and one in which living standards are rising as previously excluded individuals become part of the economy.

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But additional allocations to transport and infrastructure would require the government to make cuts in social expenditure, without further increasing expenditure. As it is, the 2011 budget projections show that the deficit fails to reach the perceived prudent level of 3 percent of GDP over the forecast period of the next three years.

The direct link between investment in infrastructure and sustainable economic growth (job creation) has been evidenced both globally and domestically.

This close relationship between robust growth (the potential to create employment) and a country’s fixed capital stock (or productive capacity) means much will depend on South Africa’s trend in capital expenditure to achieve and maintain economic growth of 7 percent, and lower the unemployment rate to 15 percent.

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Well maintained roads and extensive rail networks, particularly in relation to export volumes, are key (along with sufficient electricity) to pushing economic growth to the point where the government can significantly reduce the proportion of state finances spent on social services

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Under such a scenario, the bulk of the population can then earn enough to provide for their families’ needs. Until that time, however, there will be a trade-off between spending the limited budget on social services and improving infrastructure.

The fact that monies are initialled for job creation in the budget indicates that spending on infrastructure has been wholly insufficient in fostering strong employment-creating growth – and that it is expected to remain so in the medium term.

This is both because the government’s infrastructure expansion has taken place too slowly, and economic activity is running at a slower pace than it could if the country’s logistics could meet export demand, by getting all the goods efficiently out of the country (such as the maize and coal surplus).

South Africa’s level of human development has leapt since 1994 in respect to housing, the provision of electricity, sanitation and safe drinking water, along with the institution of support grants to help the most vulnerable members of society.

Service delivery continues to fall in certain areas, particularly health care and education, but so too has it fallen in respect of the infrastructure needs of the country.

With electricity outages occurring due to demand from faster-than-expected economic growth exceeding available supply, along with South Africa being unable to take advantage of commodity booms, there is a well recognised need for a substantial expansion in the country’s infrastructure.

But there is also a constraint on the availability of government funds, although likely further savings can be made on civil servant remuneration and benefits at the upper end and through the improved regulation of monies spent on infrastructure. High electricity tariffs and substantial borrowings are funding the expansion of electricity supply. In the case of transport, the authorities propose something similar.

In particular, the number of user-based tariffs (tolls) on road usage is set to increase, along with borrowings, to provide a sufficient road network and maintenance capacity to reduce the level of congestion.

A US report entitled Economic Benefits of Toll Roads Operated by the Transport Corridor Agencies says: “The key economic benefits attributed to toll roads arise from the… mitigation of congestion problems… (via) time and energy savings.” The report identifies that severe traffic congestion leads to “reduced business productivity and economic vitality… inefficiencies in operation of transportation systems… reduced safety…… (and) health impairment (increased stress and asthma incidents”.

The latter is presumably because vehicles spend a lot less time on the toll roads due to a reduction in congestion. However, this does not mean that congestion won’t increase on alternative routes. It also does not mean that public transport can currently provide a sufficient alternative.

The reality is that the longer it takes people to get to work, or goods to move around the country, the greater the costs of transportation, from wear and tear and fuel, to time and energy.

Clearly the scope and quantity of public transport needs to be significantly increased, along with the logistic system in general. But 2011’s larger-than-previously projected budget deficits are already to be mostly funded by increased borrowing.

This sees government debt as a percentage of GDP rise from below 30 percent of GDP to above 40 percent by 2013/14. Debt servicing costs escalate over the period, adding to the expenditure burden. Internationally, the level of a country’s borrowings is believed to be no longer sustainable once it exceeds 60 percent of GDP.

When provisions and contingent liabilities are added, South Africa’s projected debt ratio rises to 51 percent of GDP by 2013/14. Clearly the government should not aim to increase its borrowings further, particularly given the example of the sovereign debt crisis of many advanced economies.

Annabel Bishop is an Investec Group economist.

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