Last week the nation was spellbound by Oscar Pistorius’s bail application in the Pretoria Magistrate’s Court – and the spin-off involving the initial investigating officer Hilton Botha. Pistorius won his application while Botha, facing attempted murder charges, was pulled off the case.
This week we will have to be content with the drama surrounding Finance Minister Pravin Gordhan’s annual Budget presentation on Wednesday. The minister will be unable to draw an audience of the same proportions – though his pronouncements will affect our lives far more than the outcome of Pistorius’s bid to escape pre-trial incarceration.
Key issues in the Budget will be the size of the public service wage bill; progress on the government’s infrastructure programme; and whether we will have to pay more tax. A related – and crucially important – issue is the message that the Budget sends out to the world.
Until the global recession of 2008/09, the government had established a track record for sound fiscal management. Over the years, this attracted a series of sovereign credit upgrades and a steady stream of investment. The inflows financed economic recovery, boosting growth in gross domestic product (GDP) to about 5 percent a year between 2004 and 2007.
Then events beyond the control of the finance minister changed everything. As revenue collections fell short of expectations and expenditure rose, a projected surplus of 0.6 percent of GDP in 2008/09 became a deficit of 1 percent, later revised to 1.2 percent.
Presenting his last Budget in February 2009, then finance minister Trevor Manuel estimated a consolidated budget deficit equal to 3.8 percent of GDP in the 2009/10 fiscal year. It turned out to be 6.9 percent .
Gordhan, who took over later in the year, made plans to restore the deficit to manageable proportions – 3 percent of GDP. But a slow global recovery followed by a return to recession in the euro zone hit major export markets. Revenue from taxes continued to disappoint and spending pressure rose so Gordhan was unable to meet his original deficit targets.
Against this backdrop, rating agencies began to review their earlier decisions and talked of downgrades. They feared social and political pressures would make it difficult to reduce spending growth; and slowing economic activity would moderate the government’s tax take.
But Gordhan’s early projections have not been far off. In his medium-term budget policy statement in 2009, he put the deficit for the 2012/13 fiscal year at 4.2 percent. And in October last year he predicted it would be 4.8 percent. Given the damaging events of the past few years, a difference of sixty basis points is hardly a major disappointment.
If the Budget reveals a bigger deficit, rating agencies will take note. But there’s more to their decisions than the bottom line of the budget and other things shape investor perceptions. Uncertainty about policy has persuaded many investors to look elsewhere. This has been reflected in dwindling portfolio inflows.
Recent signs that the government is firmly behind the National Development Plan have brought hope of more policy cohesion. It may be too early for implementation of the plan to show up in specific numbers. The most reassuring signal the Budget can send is that Gordhan is succeeding in his aim of moderating spending on civil service wages.
This will make deficit reduction plans more credible and allow investment in the much needed infrastructure programme.