As an emerging-market country, SA has deep economic challenges. The recent student protests across the country against escalating university fees are testament to the need for economic transformation and resultant higher gross domestic product (GDP) growth.
However, SA continues to underperform its peers on growth, inflation and even on redressing the troika of poverty, unemployment and inequality. One hoped the Medium Term Budget Policy Statement (MTBPS) presented by finance minister Nhlanhla Nene would have gone a step further and laid out practical ways for SA to improve on its lackluster economic performance - but that hope was in vain.
The pace of the SA government's debt accumulation has been high since the 2008 global financial crisis (GFC) without the commensurate growth. Relative to other emerging-market countries, including Brazil, Russia, India, China, SA has rapidly added to its debt load.
Having entered the GFC with a near 30% debt to GDP ratio, SA's gross loan debt is expected to remain at around 49 percent of GDP. The National Treasury has responded by making debt consolidation its primary policy focus. The MTBPS has also highlighted that government spending will remain high; that guarantees to state-owned enterprises (SOEs) will continue to weigh on expenditure; that nuclear power generation is firmly on the table; and that tax increases are on the cards.
Appealing concept
The concept of a ceiling on expenditure is appealing, and rating agencies have previously welcomed the move by the National Treasury. In this MTBPS, the Treasury has tied the expenditure ceiling to long-term GDP growth - it is set to grow by 2.5 percent. The implementation of fiscal policy will remain countercyclical.
During weak economic outcomes, spending will be maintained at high levels, while during boom years, spending will be frugal. The problem is that potential GDP, as calculated by the SA Reserve Bank, is 2.1 percent. The planned expenditure ceiling of 2.5 percent suggests spending remains above potential and actual GDP growth. This implies that despite the current recessionary conditions, government expenditure will continue at a heady level.
This is problematic. Judging by empirical evidence, increased government spending does not necessarily result in higher growth, especially if the expenditure is financed thorough debt.
European countries that continue to languish between zero and 1 percent growth provide a perfect example that government expenditure does not ignite growth, but could instead retard it.
The dire demands of the SA economy do not afford us time to continue doing the same thing and expecting different results. Despite the rapid accumulation of debt and the related expansion of government expenditure, SA's growth has not shifted. It remains unsatisfactorily low and unable to move the needle on the troika of challenges the country faces.
The fiscal policy metric presented by Nene shows weakening tax revenue, a still lofty public sector wage bill, and a bourgeoning government debt load.
Economic prospects over the next three years remain very uncertain and put in doubt whether the Treasury will be able to meet its goal of stabilising the gross debt to GDP ratio to around 50 percent. Government continues on the path of high expenditure and remains resolute in adding nuclear power generation and National Health Insurance (NHI) to the mix of spending plans. The Treasury confirms there is momentum around National Health Insurance and that feasibility studies regarding different funding models are well advanced.
The proportion of government expenditure dedicated to funding SOEs is 38.5 percent. This is high and continues to weigh on government finances that could be more fruitfully deployed. The lion's share of the R470 billion committed for SOE guarantees is earmarked for Eskom, which is understandable as the country needs improved electricity generation. The fiscus continues to bleed from supporting non-performing SOEs.
Although Treasury remains committed to this funding being "deficit-neutral", the battle on debt consolidation will not be won if SOEs continue to underperform and seek bailouts.
Nuclear plans
The Treasury has confirmed that nuclear power generation is firmly on the table for SA. R200 million has been set aside to conduct preparatory work over the next three years relating to the procurement of nuclear power. The sum is relatively small because it is for research and development, and does not include nuclear plant construction costs.
According to data from the World Nuclear Association, which monitors countries currently building nuclear power plants, the planned eight for SA will put it among the top five countries in the world. China is currently building 28 stations, Russia 10, India six and the United States five. It is estimated that its costs $5 billion to build one nuclear power station.
Tax changes
Although the Treasury has made it clear it will approach with caution the issue of finding additional revenue sources, given the current weak economic outlook, it has not closed the door on raising taxes. Through the work of the Davies Committee, it has been shown that higher value-added tax (VAT) remains one of the options available to the Treasury to fund the economic goals expressed in the National Development Plan.
The Treasury has said there is a low probability of a VAT increase, but it cannot be ruled out. Corporate taxes were also brought back to the table. While the discussion in the MTBPS was not about the actual corporate tax rate, the issue of tax avoidance through spreading earned profit from different jurisdictions was brought up. This remains a key local and global discussion point. On carbon tax, the Treasury will soon issue a tax bill for public comment.
More needed
We have become accustomed to looking at budgets in a clinical way, around the fiscal metrics and talking about "a difficult balancing act" being required to put them together. While all that is correct, and Nene has focused on debt, much more is needed for this economy.
Fiscal policy can be used to make big changes to the economic landscape. As it stands, SA has resigned itself to low growth. The economic underperformance since the GFC is a well-accepted fact, but little has been done to turn the tide. Looking globally, countries have been in competition with each other to scrap as many laws as possible to reduce the burden and inefficiency of regulation on their economies, with India and Mauritius notable examples.
Tax policy has been structured to unleash the potential of corporates to invest and grow. India has reduced its company tax rate. Mauritius delivered a "no tax budget" earlier in the year with proposals to significantly change its economic fortunes.
One hoped Nene would go beyond the usual "difficult balancing act" and place growth at the centre of policy formulation. For example, former SA Reserve Bank governor Tito Mboweni, has proposed the establishment of an international finance centre in Johannesburg spanning "Empire Road all the way to Joe Slovo drive and then to the M2 Highway, including Hillbrow".
A vision that builds on SA's strengths such as this one can improve the economy's global competitiveness. These sorts of ideas need to find an audience in the formulation of fiscal policy. There is a need to engage in unorthodox discussion.
The status quo is not working. The negative effects of the wedge between labour, government and business are so tangible and undesired. The discussion needs to shift towards thinking outside the box.
Lesiba Mothata is chief economist at Investment Solutions. Follow him on Twitter @Lesiba_Mothata.
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