SA budget: Gordhan caught in a double bind

2016-02-23

No one can really envy South African Finance Minister Pravin Gordhan right now. His budget speech this week might well be one of his most important to date.

Given the circumstances surrounding his reappointment, Gordhan will need to placate a range of stakeholders from business to markets and above all, citizens feeling the strain of rising prices and deepening inequality.

The economy was the focal point of President Jacob Zuma’s recent state of the nation address (SONA). This was entirely appropriate, though we look to Gordhan to provide the assurances that government will do as it says and also to provide meat around the bare bones of Zuma’s speech.

In a sense, Zuma’s credibility deficit will be Gordhan’s to fill. In the SONA debate this past week, Minister of Economic Development Ebrahim Patel berated those who’ve been ‘talking down’ the economy. Yet, the facts are hard to avoid. The World Bank projects 0.8% growth for South Africa in 2016, and the Reserve Bank projections are along the same lines. The harsh reality is that for the National Development Plan unemployment target of 14% to be met by 2020, South Africa has to grow by 5% per annum.

Given the unceremonious axing of former finance minister, Nhlanhla Nene, we now have more to fix than what should have been the case. So how can Gordhan – now with his hand firmly on the tiller yet with far less to work with – reassure the markets and, most importantly, citizens who still seek a decent life and an education to liberate and advance themselves?

What are Gordhan’s choices when there aren’t really any rabbits left to pull out of the hat?

Given recent downward revisions of South Africa’s gross domestic product growth outlook to below 1% for 2016, the rapid depreciation of the rand and the higher inflation outlook, the market has high expectations of Gordhan’s budget speech. The general perception is that the speech can save us from an almost inevitable downgrade by ratings agencies. One notch down by either Moody’s or Standard & Poor’s will disqualify the country from investment grade. What this means, in effect, is that everything starts costing more.

So, what are Gordhan’s choices when there really aren’t any rabbits left to pull out of the hat?

To simply balance the budget, Gordhan will have to go back to the basics of reining in expenditure and generating revenues. In his SONA, Zuma provided a laundry list of areas where the state would make savings. Of course, the larger question is, who is actually in charge here? And who will crack the whip and keep an eye on the president himself?

Gordhan can speak with greater credibility given the circumstances of his reappointment, yet government is a big machine. We have, after all, also heard this before – yet no one seems to be able to stop the runaway ‘gravy train’ that many of Gordhan’s cabinet colleagues and the president himself are on. Patronage politics has become the order of the day and the credibility of this budget speech will lie as much in complex numbers as they will in the ability of government to do what its says and take tough decisions.

Any tax increase will have a detrimental impact on already constrained SA consumers

Firm pronouncements on state-owned enterprises (SOEs) should also surely be on the cards. During SONA, Zuma said that SOEs should be financially stable – yet Gordhan will be acutely aware of South African Airways’ (SAA’s) financial woes as well as the failed corporate governance it faces – along with other SOEs. Difficult decisions will have to be made regarding chair of the SAA board and South African Broadcasting Corporation head, Hlaudi Motsoeneng. Will these decisions happen? And who will make them? This is clearly where the rubber will hit the road for Gordhan and government’s fiscal credibility.

Much has already been said about the public sector wage bill, yet this seems an almost immutable part of the South African political and economic landscape. Interestingly, the SONA address was clear on the concerning question of nuclear expenditure and that South Africa will only enter into a nuclear deal if it was affordable.

The brazen hijacking of the National Treasury in December was largely rumoured as linked to the nuclear deal and the potential benefits to the president and his cronies. A test of Gordhan’s mettle will be whether he could harness the political heft and say no to expenditure that may bind us ad infinitum.

Cutting costs is one thing, but the more salient question is how, in this environment, we can generate revenue. It is hard to imagine that in an election year, the government would want to implement an increase in value-added tax and risk alienating its base. This leaves Gordhan with a couple of other options, including a possible increase in the marginal tax rate, or increasing the fuel levy.

Will the SA government be able to stare down the unions on the thorny issue of privatisation?

Any tax increase will have a detrimental impact on already constrained consumers, however, and Gordhan will have to tread carefully. South Africa’s lower growth scenario therefore finds our finance minister caught in between the proverbial rock and a hard place. Lower growth has a negative impact on corporate tax income; while increasing corporate tax could have a negative effect on growth – and lest we forget, Standard & Poor’s has unequivocally stated that they are first looking for economic growth.

On the surface, it feels as though Gordhan is in a precarious position and there is little he can do to have significant impact. However, there is another school of thought that suggests government should be selling off SOEs as a way to raise cash and up the ante on efficiency.

Needless to say, the ideological debate on the big ‘P’ of privatisation would be bruising. Just this week, government postponed the implementation of the Taxation Amendment Bill to March 2018 as a direct result of opposition from the Congress of South African Trade Unions. One has to wonder whether government would be able to stare down the unions on the thorny issue of privatisation, especially since it’s an election year.

So while staving off a downgrade will be Gordhan’s immediate challenge, the structural challenges facing the economy – together with the deepening levels of inequality which threaten our social compact – will need creative solutions that perhaps go beyond a single speech.

Judith February, Consultant, Governance Crime and Justice Division, ISS Pretoria

This article originally appeared on EyeWitnessNews.

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