Business, Politics

The great disappearing trick Budget

By Branko Brkic 17 February 2010

Finance minister Pravin Gordhan’s first Budget is a bit like a magic trick: look at it once and you see a mountain of goodies. Look again, and they are gone. First, the glass is half-full; then it’s half-empty.

The most searing glass half-full/half-empty trick is the biggest item of all: economic growth. Government needs to accurately assess the rate of economic growth because the art of budgeting is to avoid large windfalls or large shortages.

Gordhan is predicting GDP growth at 2.3% in 2010, rising to 3.2% in 2011 and then 3.6 by 2012. Well, that’s half-full, isn’t it? Things are going to get better, gradually but steadily. Perhaps.

But actually, the glass is half-empty. This estimate reflects an astounding and working lack of ambition. At that rate of growth, the overall unemployment rate stays precisely where it is. All development economists will tell you that rule number one in the process of growing the economy is to aim at growing the economy. These anticipated growth rates suggest an element of defeatism.

Despite this particular glass being half-empty, it still overflows into everything else. National government’s net loan debt is projected to rise from R526 billion at the end of 2008/09 to R1.3 trillion in 2012/13. Yowzer!

What by now looks like a terribly half-empty glass, is actually not as bad as it seems. Because GDP is increasing over time and because SA’s debt rate is currently so low, public debt is expected to rise from 23% of gross domestic product in 2008/09 to about 40% in 2013 – well within respectable limits. (Remember Greece’s 130%?)

Phew. Furthermore, the  public sector borrowing requirement falls progressively as a percentage of GDP over that time: from 11.8% in 2009/10 to 11.1% in 2010/11 and 8.8% in 2011/12.

Yet, the amount of money government intends paying out for the pleasure of borrowing mountains of cash is just extraordinary. Consolidated government debt service costs rise from 2.4% of GDP or R57.6 billion in 2009/10 to 3.2% or R104 billion in 2012/13. Some states in the US required their governments to balance the budget, because otherwise you just end up paying bankers and investors instead of ploughing the money back into the economy. Not a good thing when you have so many programmes to support.

In short, if you are not borrowing to grow, then in general don’t do it. But here, that old glass is half-full again. In many senses, expenditure on education and perhaps also health, is not just a moral thing to do, but a sound investment, because education normally disproportionately increases productivity.

Gordhan pointed out that the education budget is not the largest budget item by accident: total amount for education is R165 billion for the year.

The other “ploughing seed” initiative was the decision to pump R52 billion over the next three years into an expanded public works programme and launching a wage subsidy scheme to incentivise the employment of youth. Give people a start and they will race ahead, so glass definitely half-full.

But how effective have salary increases actually been? Under pressure from its ally, Cosatu, whose unions are now dominated by public servants, the total public sector wage bill has almost doubled in five years. Teachers don’t get generous salaries by any means, but for the wage bill to double over five years suggests government has lost control of the hiring process somewhere along the line. As the debacle with nurses’ salaries demonstrates, in some areas it has lost control of the salary increase process too.

If teachers were producing generally better educated people, it wouldn’t matter, but they are not. Glass very much half-empty here.

What about other spending? Public infrastructure investment of R846 billion over the next three years, with Eskom, Transnet and roads agency, Sanral, getting about half we already know about. The Land Bank is to be recapitalised to the value of R2.5 billion while the Development Bank of Southern Africa is to get R15.2 billion so that it can extend capital to poor municipalities for infrastructure projects. Potentially half-full glasses, but in reality their records are bad and getting worse. The Land Bank recapitalisation is more like a bail-out than sowing the seed of future growth.

There are other growth-detracting issues too, like the long-delayed mining royalties tax, which has been suspended for four years, but is now going to be levied on minerals disposed of or exported from 1 March. Mining in South Africa has halved in terms of its contribution to the economy during the ANC’s administration. The imposition of a new and additional tax smacks of a political consideration entirely disinterested in the state of the industry.

What about the decision to “incentivise” the purchase of new fuel-efficient vehicles, which is government-speak for a new tax? If you are a greenie, glass half-full. If you can’t resist a huge SUV, i.e. you are a government minister, glass half-empty. Same applies to fuel taxes which will increase by 25.5c a litre and excise duties on tobacco and alcohol products that’ll rise sharply.

The other ANC programme of note is the “social grant” system, which will absorb an extra R12 billion so that it can be extended to support children up to 18 years of age over the next three years. Glass half-full: no one goes totally hungry. Glass half-empty: a huge handout that does preciously little to help people help themselves.

In a sense, the real glass half-full issues are not the things Gordhan announced, but what he didn’t – the inflation target remaining between 3% and 6% and no attempt to lock down the rand.

Gordhan might come back to these issues and a study group has been established to look at them. But he was determined to set his ship sailing with the minimum of fuss for the time being.

Playing the glass half-full/half-empty trick was a good way to achieve that, so, from his point of view at least, mission accomplished. Good luck to minister Gordhan; he’s going to need plenty of it!

By Tim Cohen

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