Budget Speech 2014: We have a good story to tell you, AND we’re not rocking the boat!
- J Brooks Spector
- South Africa
- 27 Feb 2014 (South Africa)
In what might well be Pravin Gordhan’s final budget speech for the South African government – by the end of it he was giving his thanks and best wishes to almost everyone he’d ever worked with - Gordhan gave a full-scale review of the country’s economic fortunes, together with the government’s spending and taxing plans. But this was more than just a technocrat’s speech, with its long recitation of budget lines and changes in the tax code – although those were all there too. It was a careful balancing of financial and political realities. By J BROOKS SPECTOR.
It seemed structured to be deeply mindful of two critically important variables. First, South Africa exists in the midst of some seriously troubling economic times, despite the slow global recovery from the aftermath of the 2008 financial crisis. And second, as a budget, it has been rolled out just ahead of a national election. This time around, besides the now-usual yipping from the pro-business Democratic Alliance, the political landscape now also features an increasingly assertive challenge from the left to the country’s now-prevailing ANC’s political-economic orthodoxy.
Although he offered the promise of a “new economic order”, Gordhan’s budget was, simultaneously, a thoroughly conservative document – taking few if any great leaps or risky chances this time. In many ways it seemed designed to give a big hug and a kiss to the bankers and to offer reassurances to the ratings agencies internationally that things are in good hands, even if there are some the tough times at home and abroad. (In fact, analysts say the ratings agencies will probably reciprocate with a “stable rating”.)
Overall, the tax changes will include things like some modest downward adjustments to shake off the impact of bracket creep with income taxes, some significant increases in sin taxes on things like booze and smokes, and an upward bump in the fuel levy will all come into play. On the other side of the ledger, there will be some equally modest upticks on the quilt of social grants. (If you are a middle class smoker who likes a beer or two and drives to work, the budget is not particularly kind to you, but the taxes probably won’t kill you. If you get a government pension, you will get a bit more cash, but not enough to have a night on town to celebrate the rise in your pension when it clocks in at less than R100/month.)
There was the usual litany of information on spending in the various budget categories and details about spending on a whole roster of projects – large and small. Reading the speech, there is the real sense that budget priorities are clearly shifting – modestly - towards social security, education, health, programs that will encourage small business, support for youth employment and all the other useful things a government is supposed to do for its population. The government infrastructure building program gets a push, even as it comes appended with a warning that the spending must take place without being blunted by the waste, fraud and mismanagement triplets that, more and more, are becoming a norm.
There was also a litany of mild changes towards some mildly pro-business tax rules. Gordhan also reeled off statistics-laden minutes on the government’s success in fighting corruption, and efforts to increase governmental efficiency, rationalising tendering, leasing and property usage, the cutting of red tape that affects businesses and the building of a more responsive civil service.
There was one interesting initiative that will probably not get the attention it deserves, observed financial analyst Chris Gilmour of ABSA. Gordhan announced moves to allow stokvels to purchase tax-free government bonds collectively. This could actually have important implications for investors, if not necessarily for the government’s finances. Up until now, government bonds needed to be purchased by individuals. But, with this innovation, unproductive savings – now tucked away in a mattress or a cigar box - will earn members some interest and even help a little bit to keep the cost of government borrowing down. There’s considerable money in stokvel savings groups, and getting them into more sophisticated and remunerative savings plans could have real, positive social benefits for the stokvel members – besides the income.
Surprisingly, or perhaps not, there was no real mention of the big newsmaker from Gordhan’s earlier mid-term budget speech – all that doing away with those bling-bling expenditures by extravagant senior officials with those embarrassing ultra-expensive cars, the single malt scotch-lubricated receptions, and those over-padded delegations on foreign travel and the overuse of six star hotel accommodation for extended periods. While a really tough push on these was a bridge too far for the treasury, Gordhan did say curbs on government spending on itself would make a U-turn in future. The average 6% year-on-year increase in the state's party bill will be cut an average of 5.7% a year until 2017.
But at the same time, reining in expectations of any bold new efforts, Gordhan said, “I need to caution that success in implementing these plans depends on discipline, hard work, cooperation and sustained improvements in productivity, both in the public and the private sectors. Our present circumstances oblige us to live and spend modestly and keep a careful balance between social expenditure and support for growth. [Italics added] And so in framing the 2014 Budget, Mister Speaker, we have reprioritised expenditure within the overall ceiling set in the October Medium Term Budget Policy Statement. The budget deficit will steadily decline over the period ahead.” At least that’s the plan.
Attempting to steal a bit of rhetorical thunder from the Economic Freedom Fighters, at the outset, Gordhan had said, “So the new economic order we seek cannot just be a pact amongst elites, a coalition amongst stakeholders with vested interests…. Nor can it be built on populist slogans and unrealistic promises.” Not precisely the words one might have expected from a committed social revolutionary with a pharmacology background, but, well, things have changed.
Calling his fiscal plans for the next three years a foundation for structural reform, he said: “We have to work together to radically change our economy.” Thereafter, following that injunction, it was essentially as if to say: “keep with that course, helmsman, steady as you go.” There probably wasn’t much else he could do realistically, given that South Africa has now joined yet another new international group, “The Fragile Five” of wobbly economies, the fact that it is firmly mired in the mediocre band on international transparency and corruption indices - and the fact that its growth rate remains stolidly low-end, even by comparison to several other African states.
A good chunk of Gordhan’s speech also went to deflating possible expectations about new, bold initiatives that would be cash heavy. Given the country and government’s less than glowing numbers (that persistent current accounts deficit, the large and growing share of the economy that is the government budget and the equally large and growing share of that budget that goes to salaries, the sinking rand, the troublesome labour scene, those “service delivery protests”, the exhaustively reported pervasive corruption, waste and mismanagement in government accounts), there really isn’t room for the kinds of new initiatives the left would have hoped for in a government budget that is presumably aiming for a tough, tightly managed developmental state. But never mind.
Instead, Gordhan explained that over in the treasury’s offices, they have to keep their eye on the realities of the universe they live in now. As he said on Wednesday, “Potential domestic risks to the outlook include further delays to the introduction of new infrastructure, particularly additional electricity capacity, higher inflation due to the weakness of the rand, and protracted labour disputes which could depress consumer and business confidence…. Yet I need to caution that success in implementing these plans depends on discipline, hard work, cooperation and sustained improvements in productivity, both in the public and the private sectors. Our present circumstances oblige us to live and spend modestly and keep a careful balance between social expenditure and support for growth.”
This is pretty close to Mr Micawber’s famous financial advice to young David Copperfield, rather than a call to bold economic reforms.
If those rhetorical frowns weren’t explicit enough, Gordhan noted, “In last year’s Medium Term Budget Policy Statement, we targeted revenue of 28.6 per cent of GDP, consolidated spending of R1.2 trillion and a deficit of 4.1 per cent in 2014/15. Since then, the rand has weakened and inflation has picked up. Long-term interest rates have continued to rise moderately, and the Reserve Bank has increased the repo rate by 50 basis points. These trends reinforce the need to moderate public expenditure, lower the budget deficit and ensure that public sector debt stabilises relative to GDP.”
Not surprisingly, perhaps, the finance minister chose to blame many of South Africa’s problems on the behaviour others – something that has become something of a mantra for finance ministers and economics ministers when things are tough or unpalatable. As Gordhan argued, “We remain concerned about the self-justifying narrative from certain quarters in the developed world – the idea that emerging markets are the ‘problem’, that they must ‘get their houses in order’ and that global cooperation for a more humane and sustainable future is a project for another day. These are voices from precisely those places where huge regulatory failures led to the financial earthquake we have experienced. Geo-political gamesmanship is the order of the day, collaboration in addressing global challenges is deferred and global statesmanship is in retreat.”
It may be a fair point to argue that in today’s interconnected, interdependent world with that unruly electronic herd of fund managers on the loose, trouble in one country - say America and the 2008 housing bubble and resulting global financial crisis - will ultimately be passed on to everybody else. Nevertheless, a country’s financial managers - say South Africa’s in this case - are ultimately the ones who have to live with the consequences of their own choices as well. It may not be particularly useful to spend one’s time begging for a mulligan when things are hard.
Looking forward, Gordhan saw some economic sunshine up ahead, even if things are, admittedly, a tad gloomy right now. His promise to push economic growth up to 5% a year eventually seems unlikely to materialise, given the tough global environment. Here is where the biggest challenge to this budget and the broader economic outlook really come into play.
Economists are increasingly saying that the government’s projected 2.7% rate of growth for 2014 is now unrealistic – 2.4% or even lower seems closer. Even the higher number is not going to generate new job growth for new workforce entrants, let alone absorb any of the long-term unemployment that remains persistently in the 30%+ range (at the expanded definition). Moreover, 2013 growth is now estimated as having clocked in at under 2%, rather than an earlier, more optimistic level. If the lower level for this year is right, the lower growth rate is also going to cause difficulties with tax revenues, increase social welfare costs, and throw the rest of the plans out of whack as well.
In some ways, if Gordhan does depart after the May election, he would gain the reputation for having left the economic house in order on his watch. But, he will also be leaving the nasty bits to come for someone else to cope with on their watch. Soon enough, speculation will pivot to the question of who will be Pravin Gordhan’s replacement as finance minister in the next Zuma administration - when some of those more troublesome economic chickens start coming home to roost. DM
Photo: South Africa's Finance Minister Pravin Gordhan speaks to President Jacob Zuma (R) during closing remarks during the 5th BRICS Summit in Durban, March 27, 2013. REUTERS/Rogan Ward