South Africa

South Africa

The 2013 budget and the NDP: Not the most comfortable of bedfellows

Despite having less and less financial wiggle room in which to manoeuvre, Minister of Finance Pravin Gordhan had the tricky task of having to embrace the longer-term development imperatives of the National Development Plan. He also had to address more insistent social needs, the business climate and the demands of the middle class not to be made the cash cow for government corruption and fruitless expenditure. All of which left the minister with little to smile about, writes J BROOKS SPECTOR.

Finance Minister Pravin Gordhan delivered his lengthy budget speech to Parliament and the nation on Wednesday. And since then, the nation’s financial experts and commentators have been breathing some public sighs of relief about what Gordhan’s budget didn’t include. There were no broad, general tax increases. Similarly, there were no major “slash and burn” cuts into popular programmes. There were even some modest plans to encourage investment and savings.

Gordhan’s budget message had a bit of this and bit of that in it for almost everybody concerned. There were cautious changes in tax rates; modest adjustments upwards on sin taxes and fuel levies; slight changes for the treatment of investment income and savings; some slight bumps upwards for various social grants; a way forward towards some form of outside assistance – specifics to be determined later – on underwriting a youth wage project. And importantly, too, Gordhan clearly did rather more than simply give the lip service to the National Development Plan that listeners had heard in President Jacob Zuma’s recent State of the Nation Address.

In principle, Gordhan’s newest budget – as with all successive budgets – is supposed to be joined at the hip with the National Development Plan. This would put real budget cycle muscle onto the 17-year goals set out in a plan meant as the preeminent national project – through the year 2030. And so, with that in mind, Wednesday’s speech was supposed to flesh out these connections for the coming financial year – and be an intimation of things to come for the next 17 years as well.

Right from the top, Gordhan embedded a direct, congruent lineup with the NDP – as well as explicitly drawing on the broader traditions of liberation ideology, the history of the liberation struggle, and national development plans that have preceded the current one. As Gordhan told his audience, “We have taken many steps to create the conditions for higher levels of confidence in our economy and society. Now we are ready to implement the National Development Plan. South Africans have a rich history of acting together for a better future.

“Thirty years ago, the United Democratic Front brought together people of goodwill and foresight from all corners of the country…. We did the same for the first democratic elections in 1994, which laid the basis for an enduring democracy. The Reconstruction and Development Programme [an earlier development strategy] is the foundation on which we build.” 

Gordhan then went on to caution his audiences: “It is this collective heritage of struggle, these common yearnings, which are our greatest strength… At the same time the challenges facing South Africa are enormous. Only a comprehensive approach to harnessing the resources of our country can reverse the crisis created by Apartheid. Only an all-round effort to harness the life experience, skills, energies and aspirations of the people can lay the basis for a new South Africa.

“The schools, clinics, taps and houses we have built since then are testimony to the truth of these assertions. The freedom and democracy we cherish – and the knowledge that these are permanent, inalienable rights grounded in our basic law – are the foundation on which all South Africans can make a contribution.

“Looking back on the path we have travelled since 1994, we see the importance of a long-term perspective on development and change. It is people acting together for a common vision that connects the past to the present, and makes a better future possible.

“The challenge for us, honourable members, is that people are asking if we can sustain our ‘miracle’. They are asking whether we as a nation have the ability, the will and the wisdom to take another leap forward in reconstructing and developing South Africa. They are asking whether South Africans can still show the world how to overcome intractable problems that face the community of nations. In these trying times, South Africans too ask the question, ‘can we be a winning nation?’”

Gordhan then argued, “…The imperatives of change are not just challenges to government; they confront all of society. A new framework for development is an opportunity to unite around an inclusive vision, and join hands in constructing a shared future. The National Planning Commission has cautioned that our development objectives will take time and hard work to achieve. Measured year-by-year, district-by-district, there will be advances and there will be setbacks. But in each five-year term of government we must demonstrate, as we have since 1994, that we can meet more demanding milestones – more jobs, more enterprises, more technological innovation, better housing, progress in education and health….”

But in his 2013 budget presentation, especially given the landscape of the larger global and South African economic doldrums, Gordhan had a particularly awkward, finicky path to pick between the longer-term development imperatives of the NDP; the need to address more immediate, insistent social needs; the concerns by the business community to have a more stable business climate in which to invest; and the desire on the part of middle class not to be taxed beyond endurance as cash cows for wasteful, fruitless or extravagant expenditures. Or as political and budgetary analyst Abdul Waheed Patel noted: “This is the balancing act with any budget; but it becomes all the more tricky in a constrained economic environment characterised by lower than expected growth, economic output, revenue and deep unemployment, inequality and social pressures, more so going into an election year and with the expectation of giving flesh and ‘life’ to the noble objectives of the much lauded national development plan.”

As drafted, the NDP is a road map for development planning – as discussed in this author’s earlier article. But it is a plan that is designed to grow the aggregate economy even as it makes the economic result more equitable, distributes those economic benefits more widely, and simultaneously finds ways to link South Africa’s economic fortunes into the next global growth cycle.

But in explaining the limits now pressing in on the finance minister’s freedom of action, one leading business commentator said of Gordhan’s statement, “This is the ‘end-of-the-road’ budget; there is just no more slop in the bucket to dish out. For the past three years, government has put its chips on some kind of quasi-Keynesian spending solution, using up all the fiscal space [former Finance Minister Trevor] Manuel carefully engineered over the past decade with an R800 billion spree on new power stations and roads and railways and extended works programmes. In the process, debt went from 25% of GDP to 40%. SA is now above the aggregate debt level for B+++ countries, so that dog no longer barks.” As a result, the current finance minister has simultaneously embraced the expansionary tenets of the NDP, even though he actually has less and less financial wiggle room in which to manoeuvre.

This NDP plan describes the crucial elements of its growth and redistributive goals as follows:

● The unemployment rate should fall from 24.9% in June 2012 to 14 % by 2020 and to 6 % by 2030. This requires an additional 11 million jobs. Total employment should rise from 13 million to 24 million.

● The proportion of adults working should increase from 41% to 61%.

● The proportion of adults in rural areas working should rise from 29 % to 40 %.

● The labour force participation rate should rise from 54 % to 65 %.

● Gross Domestic Product (GDP) should increase by 2.7 times in real terms, requiring average annual GDP growth of 5.4 % over the period. GDP per capita should increase from about from about R50,000 per person in 2010 to R110,000 per person in 2030 in constant prices.

● The proportion of national income earned by the bottom 40 % should rise from about 6% today to 10% in 2030.

● Broaden ownership of assets to historically disadvantaged groups.

● Exports (as measured in volume terms) should grow by 6% a year to 2030 with non-traditional exports growing by 10% a year.

● [And South Africa should] Increase national savings from 16% of GDP to 25%.

But the NDP remains rather shy about saying where the funding for all of this expansionary policy is going to come from, other than effectively relying upon the buoyancy of the next great commodity boom cycle. And so, in attempting to align national budgetary and tax policies to those NDP goals, Gordhan has also had to cope with the realities of the contemporary economic universe. National economic growth is significantly below earlier expectations, the government budget is increasingly in the red, inflation is nudging upwards towards 6%, and the country’s current account deficit has been growing alarmingly as well.

A major element of the NDP – and the recent budgets of the past three previous years – has been significant infrastructure spending. To date, during the past three years, some R860 billion has been spent on what has been broadly called infrastructure. Moreover, under the NDP’s umbrella, a total of about R3 trillion spend is anticipated over the next several years as part of the Zuma administration’s large-scale infrastructure investment programme. The challenging or troubling element of this spending, besides the cost – and discounting the clearly positive effect it will have from building or rebuilding desirable or essential infrastructure – is that it is also meant to generate employment and thereby lessen the country’s woeful unemployment level.

But as an investment analyst for one of the country’s biggest banks explained after hearing the speech, the earlier spending of the past several years didn’t budge the arrow on the employment dial – and there is simply no way of reliably estimating if future spending will much effect in the future either. The problem is that much of the previous spending has gone for things like electrical distribution equipment that, although desperately needed, has had to be imported, thereby generating better infrastructure but virtually no increased employment. Much the same is true for much of the power generation expansion infrastructure. It relies heavily upon necessary, but high-value, imported items. That doesn’t produce much change in employment rolls either. Concurrently, too much of the remaining infrastructure contemplated for the future will depend upon relatively low-skilled pick-and-shovel-type work, rather than the increasingly skilled work force envisioned as being crucial in fulfilling the terms and promises of the NDP.

And that leads to a second and critical issue. The budget, at least as explained so far, while it offers increased funding for school infrastructure construction, two new universities and some increased attention to the “Dinaledi” high achiever schools; it does not apparently focus heavily on developing the mathematics and science skills crucial to achieving the NDP’s economic goals. Some observers argue that in upcoming, more detailed budgetary plans for education, some of this may be addressed, but at least in the national budget outline so far, this sense of urgency is not yet apparent.

Two additional issues crucial to the success of any NDP – as discussed in our earlier article – are the need to have a civil service that is honest and incorruptible as well as highly skilled and dedicated to the tasks at hand. While the budget does speak to these two key attributes, as was the case with the president’s earlier State of the Nation Address, in neither case are they seen as quite literally a sine qua non for a national development consciousness; that is, without such competencies and values the NDP is bound to founder. The success, historically, of countries like Japan and then, later, Taiwan, Hong Kong, Singapore and South Korea (as well as France and the US further back), all point to these elements as keys for national economic growth and development.

By contrast, as the finance minister summed up the key pillars of this budget (and its alliance with the NDP), they were largely macro-economic in nature. As the minister said: “There are signs that global growth is improving, however uncertainty remains; South Africa’s economy must grow faster and more inclusively; future growth is also dependent on private-sector investment in the economy; the National Development Plan will be implemented by government and budgets will be aligned to it; government continues to invest significantly in infrastructure; we are taking additional steps to create opportunities for young people; reduced revenue results in less spending in the years ahead unless the economy grows; [and] there are new opportunities to be seized in Africa and other emerging markets.”

But putting the best face on the finance minister’s presentation, Patel explained to this writer that, “Given the constrained economic environment and low tax base, while we all would have welcomed bigger tax breaks, this would only have resulted in less revenue for government within an already constrained environment to address the many priorities it is faced with. It would appear that those tax breaks and incentives that have been built in are in line with support for developing and realising the implementation of key government objectives, e.g. industrialisation through special economic zones, biofuels, manufacturing, SMMEs and the jobs fund.”

Patel continued: “So whilst there has been a constrained environment for the budget, incentives that have been supported are aligned with government priorities and programmes that have proved to work well and deliver results, which have now been propped up to deliver further growth and development, whilst discontinuing support for those that perform poorly and are not aligned with the national development plan and key government priorities.”

Now it is absolutely true that turning a budgetary ship towards new or different goals is enormously difficult and it takes energy and time to make it work. Concurrently, much of any government budget is essentially fixed in a kind of governmental concrete. In the US, for example, after defense, entitlement payments and interest on the national debt are subtracted; there is only about 15% to “play” with for any president and his administration.

The challenge for South Africa, however, is that around half of the total budget is now allotted for government service personnel’s salaries. Add to that the growing burden of increased social grant spending, those negative numbers in national accounts, and the weight of that planned and promised infrastructure spending, and there probably isn’t much left in his wallet for new and interesting budgetary experiments either.

The current finance minister doesn’t have the luxury his predecessor had during those salad years at the beginning of the global expansionary “go-go” 21st-century economy. Throw in the shadow of the continuing global slump and the end of the long cycle commodity boom to the minister’s worries and perhaps one should marvel Pravin Gordhan managed to smile at all on Wednesday. DM

For more, and in addition to a tidal wave of commentary in South African media on the speech, read the minister’s full budget text:

The 2013 Budget Speech – Pravin Gordhan, at Politics Web (among other sites)

Photo: Former tax authority chief Pravin Gordhan (R) talks with Trevor Manuel after Gordhan was sworn in as the new finance minister at the presidential guest house in Pretoria, May 11,2009. REUTERS/Siphiwe Sibeko


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