#Budget2016 / In some ways we were probably hoping for miracles from the finance minister – seeing him as the ultimate redeemer of the country’s wide range of social, political and economic woes. And in so doing, appeasing the jittery markets (both local and abroad), while at the same time crafting a strategy that will pave the way towards the creation of immediate growth and job creation, and long-term development. The major objective, however, was probably to restore the sovereign credibility of the state.
In this regard the current reality called for a commitment to “get the basics right”. Investors are looking for fiscal (and monetary) discipline, and investor-friendly and predictable, surprise-free policies. This means that the minister of finance had to table a Budget speech that displayed fiscal restraint (that is, narrower budget deficits over the next few years), that showed a commitment to eliminating wasteful and unjustified government spending, and that confined “hand-outs” to the minimum.
At the same time, it was crucial that the minister should look beyond and through the current crisis to show an intent to plan in a systematic and holistic fashion for a post-2016 crisis rejuvenation and transformation of the country’s economic architecture. Job creation, poverty alleviation, and less inequality remain not only important in and of themselves, but also to convince investors of the long-term attractiveness and feasibility of SA Ltd.
The basic assumptions regarding the short-term performance of the economy came as no surprise; various institutions (including the World Bank, the IMF, and the SA Reserve Bank) have been pointing toward economic growth for 2016 of less than 1 percent (following last year’s estimated 1.3 percent). A modest improvement of 1.7 percent is suggested for 2017.
While technically, therefore, the country may avoid a recession, production growth is not matching population growth, which means that real gross domestic product (GDP) per capita growth is declining, while very little net job creation can be realistically expected this year. If we add to this rapidly rising food inflation, and rising interest rates, the reality is that many South Africans are feeling recessionary-like conditions. While the Treasury’s forecasts make depressing reading, they are plausible, and broadly in line with expectations. It is always encouraging when finance ministers avoid the temptation of basing their budget arithmetic on unrealistically inflated expectations.
It stands to reason that different stakeholders in society will interpret and feel the effects of the Budget speech in different ways, depending upon their own political ideology, and/or personal financial situation, and/or personal vested interest.
That said, the speech was dominated by two major themes. First, fiscal discipline. The budget deficit is forecast to decline from 3.9 percent of GDP in 2015/16 to 3.2 percent this year, and to reach 2.4 percent in 2018/19. As a consequence, the government debt-to-GDP ratio is set to stabilise at 46.2 percent in 2017/18.
This set of encouraging figures is to be achieved on the spending side by lowering the government expenditure ceiling by R10bn in 2017/18, and by R15bn in 2018/19 through a reduction in public sector compensation budgets. On the income side, an additional R18.1bn is to be raised in 2016/17, and a further R15bn in the next two years. This will be done through adjusting tax and improving tax collection. Sin taxes will rise, as will the general fuel levy. Sugar will become sinful in April 2017! And a tyre levy will be introduced in October. Relief is to be granted to lower and middle income personal tax payers, and there is to be an increase in the monthly tax credit allowances.
The second major theme was the recognition of the National Development Plan (NDP) as a set of guiding principles for future inclusive growth, and for framing this year’s budget speech. Particular reference was made to infrastructure investment and education as key prerequisites for sustainable growth, job creation, poverty relief, and greater income equality.
Ticking the right boxes
Will investors be appeased by the Budget? Will we avoid junk bond status? Will the rand stabilise? On the face of it, the fiscal “bookkeeping” seems to tick the right boxes. Sovereign risk is a function of the perceived willingness and ability of a government to meet its debt commitments. The former has never really been in doubt; the latter for now seems to be intact.
However, the Budget speech was rather “light” on the details regarding increased tax revenue. It is certainly surprising that tax collection targets are assumed to be achievable without raising personal, corporate and VAT rates. Of more significance is the intention to cut back on government spending, particularly with regard to various components of the civil service wage bill, and by streamlining and closely monitoring procurement and supply chain processes. Plans are also afoot to improve the governance of state-owned enterprises.
On balance, the Budget probably surprised on the upside. Fiscal prudence seems to have triumphed, but without causing too much financial distress to punch-drunk consumers. And herein lies the potential concern: the risks to the global and domestic outlook are high, which means the forecasts regarding, for instance, tax revenue are disturbingly vulnerable to a very small margin of error.
It should also be pointed out that the government now accounts for about a third of economic activity, while 30 percent of profits, wages and salaries generated by businesses and consumers are handed over to the government.
Gordhan probably went a long way towards restoring the economic psyche of the nation amid the international and local turbulence that prevails. He managed to steer a plausible balance between the short-term economic imperative of restoring fiscal sanity, without taking (too much) away from consumers and voters. He has also put into place, longer term strategies and ideas aimed at supporting the objectives of the NDP.
Did the minister resolve all the country’s social and economic problems? No. Could he have resolved all the country’s social and economic problems? No. He had to be mindful of the fact that a trade-off had to be made between efficiency (society getting the most that it can from its limited resources) and equity (the benefits of those resources should be distributed fairly among the members of society).
In the short term, the trade-off dilemma was even more compelling: Should policy aim to achieve and maintain fiscal rectitude, or should limited (state) resources be allocated – willy-nilly – to boost growth and incomes in what will probably turn out to be an unsustainable fashion?
American economist Thomas Sowell made this point scathingly clear when he said: “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” These are particularly important words now in South Africa, on the eve of the local elections.
* Andre Roux is a professor in Economics at the University of Stellenbosch Business School (USB).
** The views expressed here do not necessarily reflect those of Independent Media.
Be sure to follow #Budget2016 developments on Business Report as we bring you news, reviews, analysis and opinion regarding Finance Minister Pravin Gordhan's speech on February 24 and 25.