Finance minister Nhlanhla Nene presented his maiden budget speech on Wednesday as his government faced a complex blend of domestic and international challenges. Personally, he also had to take a stand, come out of the shadows of the previous two finance ministers whom he had served as deputy minister, showcase his ‘political capital’ and reveal his fiscal strategy as part of building his credibility.
Back in October 2014, and as part of his Medium Term Budget Policy Statement (MTBPS), Nene promised to follow a path of fiscal consolidation. Since then, matters have worsened both on the economic activity front and with regard to domestic politics, which have piled further pressures on his government. His immediate and daunting task, however, was to avert a likely downgrade in the country’s sovereign risk rating, which now stands just one notch above the junk status.
It was an ‘expected surprise’ that taxes would go up and public expenditure would be contained. The question was, which taxes and what type of expenditure? The minister did not disappoint. He confirmed his medium term fiscal strategy based on the following five guidelines:
By keeping the growth of non-interest public expenditure at 2.1%, the minister, for the first time in nearly 20 years, is forcing a considerable check on real government expenditure. This became even more considerable given that expenditure on items such as education, health and defence is projected to increase well above 7% on average. Deep cuts in real public sector expenditure are presented in Budget 2015. Whether such cuts will be effected remains to be seen.
On the revenue-raising front, the minister opted to raise personal income tax by 1%, and deny the middle- to higher-income earners any bracket creep adjustments; this was the first personal income tax (PIT) rise in the past 20 years. In addition, fuel levies were raised sharply, and energy taxes and transfer duty on property were raised for the rich. All in all, the ‘rich individuals’ were sacrificed on the altar of national solidarity and improving gross maldistribution of income in the country. Technically, of course, PIT is a much more reliable source of tax collection, especially in times of low economic performance. First prize, however, would have been an increase in VAT. But a rise in VAT would have been a hard sell in a country that has widespread poverty, hard-pressed middle- and low-income households, and a government that lacks expenditure morality.
With a projected GDP growth of 2% in 2015 rising to 3% in 2017, the minister hopes to deliver a deficit/GDP ratio of 3.9% for the fiscal year 2014/15 and narrowing it to 2.5% in 2017/18. Based on the same growth assumptions, the ratio of public debt to GDP is projected to stabilise at 43.7% by 2017/18. The cost of servicing public debt is projected to rise unabated.
The thrust of the minister’s message was aimed at convincing capital markets, and rating agencies, that the National Treasury was taking the threats of being downgraded to junk status seriously. With a clear conservative fiscal strategy, the minister managed to wield enough political power to effect much needed deep cuts into the government’s inefficient, and at times counter-productive, expenditures, without reducing critical allocations to key sectors such as education, health and defence. With a range of proposed institutional reforms, inter alia supply chain management, the minister succeeded in averting any short-term re-rating of the country’s global creditworthiness. For these explicit attempts, in my view, the minister earns two cheers for his Budget Speech 2015.
But the budget speech remained unconvincing with regard to some key questions and evident risks. While acknowledging that “energy uncertainty” was a present and binding risk to South Africa’s economic activity, the minister failed to own up to his government’s failure to put in place a credible energy policy that would eliminate this binding threat to GDP growth over the next few years. By focusing, once again, on (national electricity utility) Eskom’s financial woes, the minister distracted attention from the fact that the real problem is not Eskom; rather it is the lack of a reliable, sustainable, and competitive energy market in the country.
Over the past decade and since Q1-2008 in particular, the government has perpetuated this malfunctioning energy market by placing the rising burden on Eskom and thereby forcing Eskom to its current financial and operational troubled state. The solution to energy security is not going to be solved by allocating R23-billion to Eskom. Near-full reliance on a single generation for the country’s energy needs remains the biggest risk to the projected GDP growth of 2% to 3%. The issue of energy market in South Africa has, of course, become over politicised mainly due the government’s adherence to the notion of a “developmental state” where the strategic levers of the economy – of which energy is regarded as one – should remain under the firm control of the state. Ironically, neither the state nor Eskom is in a position to finance the full energy requirement of the economy if GDP grows much higher than 1.5%.
The second area where the budget speech was conspicuously silent was on the critical issue of how to reverse the faltering investor confidence in the country. Central in this regard is the question of labour market volatility, driven largely by the over-politicisation of labour unions, and somewhat dysfunctional labour legislation. Consequently, it has been hard to reach agreement on some of the basic policy issues that are vital for the turnaround within the economy. Even the much trumpeted National Development Plan (NDP) has become yet another source of splintering within the ANC and its alliance partners. Even within the Cabinet, which has formally adopted the NDP, there are dissenting voices around some of its policy recommendations. Against this backdrop, the best that the minister could do was to express his frustration with regard to the NDP by saying, “If we remain united and energised around its implementation – government, labour, business and all South Africans –we will continue to make progress towards a just and prosperous future.”
The third issue, and related to labour, is that the minister carefully steered away from the need for restraints on public sector wage demands. This is the single largest item (40%) of non-interest expenditure within the budget. Whereas the budgetary projections allocate a 5% increase in the government wage bill, public sector unions speak of a double-digit increase. Some even demand 15%. No doubt, over the next few months, this issue is bound to become another source of political economy noise on the socio-political scene.
Interestingly, the budget speech offered a number of sectoral incentive allocations to, inter alia, the small business sector, agriculture, housing and inner-city renewal programmes. The political economy goals were explicit: job creation and the promotion of labour intensive activities with low-energy intensity. Whether or not these interventions will prove effective will depend on the operational frameworks that respective line-function ministries will announce over the next two months.
For now, the budget speech 2015 has kicked into motion a process of fiscal consolidation without promising fiscal sustainability. In particular, it has tabled the two thorny and major programmes of National Health Insurance and social security reforms. Unless GDP growth accelerates on a sustainable basis and the political economy temperature moderates effectively, these issues will lurk in the background with serious risk to fiscal sustainability framework. DM
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Iraj Abedian, CE: Iraj holds a PhD in economics from Simon Fraser University, Canada. He was professor of economics at University of Cape Town (UCT) before joining Standard Bank as Group Chief Economist in 2000. He was extensively involved in economic and financial policy as well as institutional restructuring of South Africas public policy after 1994. In 2005, he founded Pan-African Capital Holdings (Pty) Ltd. In addition to growing the companys investment portfolio, Iraj was centrally involved in the conceptualisation and capital raising for a KZN Infrastructure Growth Fund (R1,5 billion), and the establishment of South Africas first environmental clean tech Fund (US$ 94 million fund), as well as the design and establishment of a housing finance fund called Housing Investment Partners (HiP). Within the Pan-African Capital group, he has helped establish two private equity funds, totalling R650 million. Iraj currently serves as a non-executive director on the board of Munich Re of Africa and Capital Fund Properties Ltd. He maintains an active interest in public policy discourse (macroeconomic policy, mining policy and infrastructure finance) and is an extraordinary professor of economics at Graduate School of Business Sciences (GIBS) of University of Pretoria. Over the past five years, he has also served as a member of the National Spiritual Assembly of the Bahais of South Africa- a not-for-profit religious body with focus on the promotion of spirituality within the society at large.
Adolf Hitler was the first European leader to ban human zoos.