Spending smarter is Gordhan’s only option

Finance Minister Pravin Gordhan will deliver his fourth Budget on February 27 and we don’t envy the position he is in. Facing an ailing economy but not being able to ramp up spending can only be “taxing”

Does this mean there is nothing he can do to help revive the economy? The plausible answer is no.

It’s a little more than three years into the economic upswing, yet growth continues at just 2.6 percent. Based on past form, real gross domestic product (GDP) should be expanding by at least 3.5 percent by now: it also compares unfavourably with the comeback of other emerging countries since the global financial crisis.

Nor is it apparent the upturn is about to show much further improvement.

Indeed, as consumer spending – the driver of the recovery so far – continues to slow, it remains unclear what will take up the slack. A boom in exports is not guaranteed, even if rand weakness persists and global growth accelerates to 3.5 percent.

Facing these constraints, the minister would be eager to help reinvigorate the economy by fuelling spending.

But this is a luxury he does not have. Failing to stick to the target he has set of lowering the budget deficit to 4.5 percent of GDP in 2013/14, and to 3.7 percent in 2014/15, could even trigger another sovereign credit rating downgrade.

So, what is to be done? Instead of simply spending more, the minister has to re-evaluate how the government spends its money, or risk growth remaining lacklustre and the unemployment rate high.

Two things are urgently required. First, efforts to cut wasteful spending must be intensified and the savings they bring about must be used more appropriately. Second, the impact of spending needs to improve. And this can only happen if the infrastructure deficit is tackled more forcefully.

Too much of taxpayers’ money still goes into things the government does not need, can do with less of, or can manage better. It’s concerning, for example, that the national government and provincial authorities have spent about R170 billion in 2012/13 on consultancy fees, printing, security, telecommunication, advertising, and fuel. It equals about 80 percent of the entire budget spent on education last year.

But cutting excess is not enough. Unlike previous instances where money freed up was used to “square the books”, such as funding overspending on wages, future savings have to be invested in ways that are properly growth enhancing.

Here are a few ideas of how this may be achieved. It is well understood that companies have cash available, but other than re-tooling, are hesitant to invest as confidence levels are low. Long-term tax and investment incentives can help change this.

Extending similar incentives to small businesses and expanding measures to help with access to finance and technology will do wonders too. If these ideas don’t fly, what about a pledge to invest every rand saved through cutting fat into a properly functioning fund to promote entrepreneurship, or research and development?

As recognised by the minister, the mix of government spending has to change. As the share of consumption expenditure has grown, so the share of capital expenditure has fallen to about 7 percent of consolidated government outlays. To reverse this trend, the government needs business to accelerate infrastructure investment. When raising spending is not an option, spending smarter becomes the only viable way to give the economy an urgent boost.

Ettienne le Roux is the chief economist at Rand Merchant Bank.