One of the most difficult hurdles for economists is that laymen always expect them to be able to predict the future meaningfully and accurately. The only thing that is further from the truth is to say that we would still have had an expansionary budget even if it were not for the existence of the RDP, and next year's looming elections. As always I have to congratulate Meme Saara on a job well done. 

There is nothing much wrong with the budget, or anything at all I can fault.
The budget is in line with expectations and even the votes that have received considerable additional allocations over the MTEF, I expected. After all, next year is an important election year, and nobody in government will like to find out too late, the population was looking for more. The budget is fine, and the allocations are fine. There is more than enough capital in this land of ours to fund all the development we need for the next 50 years. Even the changes to Domestic Asset Requirements are fine. At some point, we have to realise it makes more sense for our own capital to fund our own progress than helping South Africa prepare for a World Cup.
My problem with the budget is that it makes the MTEF a farce. On face value the budgeted expenditures look fine, we can certainly afford them. But when I started crunching the numbers, the red lights came on. Then the question emerged: How much value does the Ministry of Finance itself places on the MTEF.
I used only the GDP estimates to discover the underlying trends and this is where I got a serious fright. Correctly estimating GDP is impossible, but using various formulae and models, it should be able to "predict" a fairly reliable upper and lower band. In more popular language: to draw the parameters of the worst case scenario as well as of the best. This was explained and demonstrated to me by IMF officials when I visited them in Washington in 1999, and the IMF's assistance with Namibia's budgetary process, is legendary.
When the minister published her budget last year, the MTEF also contained estimates for the GDP. Comparing the estimates for 2008, 2009 and 2010, as published then, to the estimates as published this week, immediately shows a huge anomaly. A year ago, we underestimated almost all categories, except the major expenditure items. That has obviously put us in a much better position than we anticipated, and the minister frequently alluded to this fact in Wednesday's speech.
But when I worked out the ratios, it showed that the estimates did not produce a coefficient. In a period of one year, our estimates for the current year are 5.9% off the mark. Not a nuclear explosion but also not a figure to disregard when one considers that the economy, in real terms, only grows by a hoped-for 5% per year. Then for the following year, the anomaly grows to 8.3% and the year after that to 9.4%; and that is where you must become scared.
It basically means the MTEF estimates are not worth the paper they are printed on. They are junk, and we could just as well have thumb sucked all the other figures that are based on an assumption which we now know just grows falser and falser as we approach our future mark. It is fairly normal and expected that the future estimates will carry a certain inherent flaw (nobody can predict the future) but that ratio must remain constant. The error must not grow with the years.
I support the government for all the claimed positives in the budget. It is in everybody's interest to have a pro-poor policy applied throughout. The social relief is urgently required, developing the local capital market creates the platform on which future wealth will be built, and making sure that ALL political parties get funding helps the democratic process, again contributing to our future stability.
But against a background where all indications are that world growth is severely under threat, I would have cautioned a more circumspect approach, and more conservative estimates. My pet comparison is always Botswana, a country very comparable to us, except that they have a much bigger GDP for a slightly smaller population. What are they doing right and what have we been doing wrong? The long and the short are: budget deficits.
It is something we are trying to get away from, and we are helped in two ways. First, we have really and honestly moved away from wastage and reckless overspending, and second, we have established certain expenditure benchmarks which, in my opinion, are monitored well. The results can be seen in the budgets since 2006. But we have also been helped by international developments, most notably higher GDPs all round. Whether that will remain so is anybody's guess, and going by the evidence, probably not.
Since I am not selling unit trusts, I do not, against all common sense, need to convince myself and my clients that the market will keep on doing well this year. It may or it may not, but the indicators say the risks are definitely on the downside. I predict that 2008 will still prove to a far more difficult year than any of the previous 10. If I were the Minister of Finance, I would recheck my MTEF figures.