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Budget 2016: Gordhan’s toughest test so far

Judith February is based at the Institute for Security Studies (ISS). Prior to that she was executive director of the HSRCs Democracy and Governance unit and also head of the Idasas South African Governance programme for 12 years. Anthea Gardner is founder and managing partner of asset management business Cartesian Capital, where she manages listed equity and fixed income portfolios.

President Zuma’s state of the nation address was always going to be the step-child to the Minister of Finance’s 2016 Budget speech. In a sense, what Zuma needed to do during SONA was set out a framework for what Pravin Gordhan will say on Wednesday afternoon.

To a certain extent Zuma did this. His meeting with the Top 100 CEOs informed much of the first part of his speech as the economy took centre-stage. This was entirely appropriate, though we look to Gordhan to provide the assurances that government will do as it says. In the SONA debate this past week Minister of Economic Development, Ebrahim Patel, berated those ‘talking down’ the economy. Yet, the facts are hard to avoid. The World Bank projects 0.8% growth for South Africa in 2016 and the Reserve Bank projections are along those lines too. The harsh reality is that for the National Development Plan unemployment target of 14% to be met by 2020, South Africa has to grow by 5% per annum.

Yet, if CEOs have a ‘to do’ list for Gordhan, then so have ordinary citizens. Our country, straining at the seams with anger and inequality, is battling. As Thabo Mbeki always famously asked, ‘will the centre hold?’. Mbeki was talking about the ANC but one can easily apply Yeats’s words to 2016 South Africa, where 60-65% of the wealth of our country is held by a small 10% of the population. Something has got to give. It is in all our interests to build a society more just and more equal.

Given the unceremonious axing of Nhlanhla Nene however, we now have far more to fix than we should have. So, how can Gordhan, now with his hand firmly on the tiller, yet with far less to work with, placate not only the markets but, most importantly, citizens who still seek a decent life and socio-economic rights implementation to liberate and advance themselves?

The general perception is that a well-considered, conservative budget can save us from an almost inevitable downgrade by the ratings agencies. One notch down by either Moody’s or Standard and Poors will disqualify the country from investment grade, forcing foreign investors to sell out of their South African investments putting pressure on the equity and bond market, not to mention the resultant increased cost of borrowing money for the government and our corporates. The unfortunate reality of the situation is that South African government bond yields have already traded close to junk status levels. Post the firing of Nhlanhla Nene, the benchmark 10-year R186 bond (2026 maturity) traded as high as 10.385% – compared to Turkey and Russia, both considered junk status, which are trading close to 10.4% – versus the US 10yr bond which is trading closer to 1.7%. To simply balance the budget, Gordhan will have to go back to the basics of reigning in expenditure and generating revenues.

In relation to cost containment strategies, too much has already been said about the hefty inflation-related public sector wage bill and with CPI inflation currently at 6.2% and on an uptrend, it is an unsophisticated, but easily digestible, example of the weighty task ahead of our Finance Minister. Still on the issue of cost containment, one of the big issues Gordhan faces is that of keeping the country’s debt levels in check. It is estimated that the two year Treasury redemption profile is close to R60bn. That’s R60bn that will have to be refinanced at the now higher borrowing rate. At a borrowing cost of 9% it costs the country R5.4bn in interest charges per annum, and for every 1% increase in the cost of borrowing, we add an additional R60m per annum.

All this leaves our finance minister the unenviable task of generating additional revenue to meet the abovementioned outflows. It is hard to imagine that in an election year, government would want to implement an increase in VAT and risk alienating their voter base. This leaves a few other options, which include a possible increase in the marginal tax rate, an increase in Capital Gains, inheritance tax and/or the less nocuous option of increasing the fuel levy.

Putting it into perspective, a one percentage point increase in the marginal tax rate would generate in the region of R10bn for the fiscus. At this stage, however any tax increase will have a detrimental impact on an already constrained consumer. SA’s lower growth scenario finds Gordhan caught in a cleft stick; lower growth has a negative impact on corporate tax income; while increasing corporate tax could have a negative effect on growth – and lest we forget, Standard and Poors has unequivocally stated that they are looking for economic growth before they will consider leaving well enough alone.

On the surface, it feels as though Gordhan is in a precarious position and there is little he can do to be hugely impactful. However, in a report recently released by government, commissioned by the President himself in 2010, it was suggested that the ruling party should be selling off state-owned enterprises as a way to raise cash and up the ante on efficiency. Potential independent buyers will be less likely to treat their newly acquired business (be it Eskom, SAA, Sanral, Transnet or one of the smaller SOEs) as a method of appeasing or pleasing cronies. Needless to say, the ideological debate on the big ‘P’ of privatisation will be bruising. Just this week government delayed the implementation of the Taxation Laws Amendment Bill to March 2018 as a direct result of COSATU’s opposition. So, will it be able to stare down the unions on the thorny issue of privatisation in an election year? One has to wonder.

The Big Question remains, of course, whether Gordhan can in fact prevail on his colleagues – and his boss in particular – that the reigning in of expenditure will be key? We have, after all, heard this before, yet no-one seems to be able to stop the runaway gravy train that many of Gordhan’s cabinet colleagues and the President himself are on. Patronage politics has become the order of the day and the credibility of this speech will lie as much in complex numbers as they will in the ability of government to do what it promises and take tough decisions. Our Finance Minister is like the boy with his finger in the dike, and many leaks to plug. Even if he does manage, the dam wall is still structurally flawed. DM


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