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A carefully crafted budget

Does Gordhan have the backing to follow through?

Despite the absence of the dramatic announcements that many had hoped for, finance minister Pravin Gordhan presented a subdued but carefully-crafted budget in Parliament on Wednesday. It was engineered to ensure the cumulative impact of several calculated amendments would be enough to improve South Africa’s fiscal position without the need for aggressive tax hikes.

Much hype surrounded this budget due to December’s week-of-madness and there were expectations that Gordhan would use his newly-acquired political authority to announce some significant government spending cuts and policy changes.

What Gordhan presented was the continuation of the credible fiscal management that has become the norm during the past two decades. This is supported by the markedly reduced budget deficit, which fell from 3.9% to 3.2% and is expected to decline further to 2.4% over the next two years.

Gordhan achieved this through modest increases in tax and some government belt-tightening that goes beyond the token savings we have seen in recent years.

The negative reactions from analysts and the markets largely flow from a lack of information on how South Africa can change our downward growth trajectory.  Although there is very little Gordhan can do to “ignite” growth, it would have been much more positive if Gordhan could highlight a few fresh and innovative initiatives to boost confidence. Growth is what South Africa needs as it is the key to solving many of our structural problems.

 There could be justified criticism that Gordhan missed an opportunity to cut a bloated civil service public wage bill. Though he managed to filch R15 billion from the compensation budget – which will be trickled down to the provinces – he only confirmed the current moratorium on the appointment of new non-critical staff, which seems to have had limited success in the current financial year.

The number of State officials in national and provincial departments was stable at around 1.32 million this year. The wage bill is however expected to rise by just over 6% from R432 billion to R459 billion. It would be interesting to see the reaction from trade unions.

The other key indicator is public debt. The recent devaluation of the exchange rate inflated the total debt by R45 billion, as about 10% of the debt is foreign denominated. This translates to total debt to GDP  ratio of 45.7%.

It is unlikely that government will be able to reduce this debt in the near term, and the only way the debt to GDP ratio will decline is if the GDP growth accelerates.

Projected State debt and debt-service costs

R bn/percentage of GDP

2015/16

2016/17

2017/18

2018/19

Net loan debt

R1804.4

R2003.4

R2194.8

R2382.4

 

44.3%

45.7%

46.2%

46.2%

Debt-service costs

R129.1

R147.7

R161.9

R178.6

 

3.2%

3.4%

3.4%

3.5%

 

Economic environment

The expected theme of the budget was whether Gordhan could pull a magical white rabbit from a hat to avert a ratings downgrade. Gordhan did not produce such a rabbit (which may have been impossible from the outset), but he did demonstrate that government is aware of the economic risks and that there is urgency to prevent a downgrade.

“We need to be frank about South Africa’s economic constraints. We have low growth which leads to reduced tax revenue, lower scope to increase expenditure and lower confidence levels,” he said during a media briefing.

He added that government cannot solely be responsible for growing the economy and that the private sector must come to the party. “Both government and business must do what they can to increase growth and to avoid a downgrade.”

Within this context he commended the attitude and commitment of the senior executives he and President Jacob Zuma met during the past month, and said actual tangible outcomes will be announced in the weeks to come.

State-owned enterprises

Gordhan did not pull any punches about the dismal financial performance and low levels of efficiency of many State-owned enterprises (SEOs). Apart from an announcement that there will be a review of all SOEs and some aggressive rationalisation to reduce duplication, there is also a clear intent to improve the financial positions of several big SOEs such as SAA and Eskom.

Government has already provided support in the form of guarantees, which now total R467 billion or 11.5% of GDP. The technically insolvent SAA is at the top of the agenda and has received bailouts of R14.4 billion and it is clear that a minority stake may be available for a strategic partner to improve operational efficiencies.

Gordhan stressed during the media conference that he did not use the term ‘privatisation’ and insisted that such a strategic sale would be accompanied by strategic investments from the new partners.

He also hinted that SAA may soon have a reconstituted board, which may pitch him against chairwoman Dudu Myeni, a very loyal Zuma ally.

Political backing

The elephant in the room is whether Gordhan has the political backing to enforce the cost-cutting measures and to implement the greater oversight of SOEs. The composition of the new SAA may be an early indicator whether Gordhan can push through such changes. (The future involvement of the South African Revenue Service acting CEO Tom Moyane, who was a glaring absentee at the media conference, could also be another litmus test.)

This may also be a concern of rating agencies.

Gordhan skillfully avoided a question whether he was confident that he did indeed have the political backing to execute Treasury’s plans. He merely smiled and said: “If I am still here in October to present the Medium Term Budget Policy Framework…I have the political backing. If I am not, then I did not have the backing.”




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