Budget 2018: Steel, engineering see lack of improved domestic demand

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Cape Town – The Steel and Engineering Industries Federation of Southern Africa (Seifsa) welcomes the government’s announced efforts to reduce its ballooning expenditure significantly and stabilise debt levels.

These are steps in the right direction, according to Seifsa chief economist Dr Michael Ade.

“These are welcome developments and targets to meet. If achieved, Budget 2018 may indicate a turning point for the domestic economy. It reflects major new expenditure commitments and corresponding reductions in line with new policy initiatives,” said Ade.

“However, the challenge is that the spending proposals reflect a trade-off between the country’s vast service delivery needs and the need to manage government’s finances sustainably and prudently.”

In what Seifsa considers to be a clear signal that government is committed to fiscal consolidation, Finance Minister Malusi Gigaba announced an increase in value-added tax (VAT) for the first time since 1993, lifting it from 14% to 15% from April 1 2018.

Ade welcomed the initiative as a clear sign of the government’s commitment to fiscal consolidation and its willingness to reduce the revenue shortfall.

He also welcomed government’s intention to increase collaboration with all law enforcement agencies to strengthen efforts to fight fraud, corruption and abuse of supply chain management (SCM) across all spheres of government.

Domestic demand

However, Ade said that, despite government’s plans to significantly cut expenditure, Gigaba’s speech lacked solid measures to improve domestic demand.

“Notwithstanding efforts aimed at supporting designation and localisation, the minister should have done more for local producers. In consideration of the hugely competitive international trade environment and increased protectionist policies taken by countries to protect their local industries, one of the best stimulatory measures within government’s control would have been to channel spending directly to local producers,” said Ade.

“Once the supply side of the economy is directly taken care of, monetary policy can be used to stimulate the demand side, including consumer spending – and this would ultimately lead to sustainable benefits for the domestic economy.”

He added that Budget 2018 was consistent with President Cyril Ramaphosa’s promise in SONA that tough decisions would be taken to close the fiscal gap, stabilise debt and restore state-owned enterprises (SOEs) to good health.

Ade said it remained to be seen if Budget 2018 would be enough to satisfy international ratings agencies.

He warned that the road ahead is still long and windy before a sustainable turnaround in the economy can be achieved, with public finances restored to good health. Containing government expenditure is necessary not only to satisfy ratings agencies or investors, but also to demonstrate government’s willingness to make the necessary sacrifices.

In Ade’s view, Budget 2018 did not provide any clear signs of a shift in economic policy, but contained “the same dose of optimism that characterised President Ramaphosa’s State of the Nation Address”.

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