Budget 2023
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Investment needed for faster growth

Cape Town – Private investment has fallen in all sectors this year and National Treasury expects it to contract by 2.9% in 2016 – the first decline since 2010.

On a positive note, the government is pleased with efforts in the labour sphere resulting in a drop in the number of working days lost to strikes, and a depreciation in the rand which boosted the country’s export prospects. This should, in theory, support greater investment.

But if economic growth remains below 2% - the country’s current potential growth rate based on known constraints - the government will not be able to sustain current spending based on its policy directives.

Growth will need to return to 3% p.a., according to the mini budget. The need for faster growth is limiting the speed at which Finance Minister Pravin Gordhan can narrow the budget deficit, as an aggressive fiscal consolidation drive could see the economy stay in a low growth trap. 
 
With this in mind, the minister and his department are continuing to work towards a stable and sustainable fiscus. Combined with transparent monetary policy and economic reforms, this, Gordhan argued, will result in economic growth rising to (+5%) levels envisaged by the National Development Plan (NDP).

He warned that everyone in South Africa needs to work towards achieving reforms that will remove obstacles to faster, inclusive, job-creating growth. 
 
However, the medium-term budget is frank about what these growth obstacles are, and they are all significantly influenced by government activity and policy: infrastructure bottlenecks, low levels of competition in certain (unnamed) markets, a volatile labour relations environment, regulatory constraints, red tape, inefficiencies in state-owned enterprises (SOEs), and economic policy uncertainty.

Success in reducing these obstacles depends on how well these efforts are coordinated and put into action.
 
Tertiary education
 
Spending for post-school education and training will increase by 9.2% p.a. over the medium term – the second-highest projected rise in function spending after a planned 10.1% p.a. increase in debt service costs.

However, most of this will go to early childhood development as well as vocational and technical skills training –  in line with the post-school education goals set out by the NDP. At the same time, only one in 10 students attending TVETs during 2010-2014 actually finished their course.
 
Transfers to universities and the National Student Financial Aid Scheme (NSFAS) will rise by 10.9% p.a. and 18.5% p.a., respectively. Some of this money will come from a drawdown in contingency reserves.

Furthermore, instead of committing to free tertiary education, the medium-term budget indicated that a roadmap is needed towards fully financing the cost of study for poor and working class families. The plan will have to consider how to maximise social and economic transformation. This implies that if university education is increasingly subsidised, the benefits (i.e. increased quality of labour supply) would need to filter down to the country as a whole.
 
Stance of rating agencies
 
Standard and Poor's (S&P) currently rates South Africa BBB- (the lowest possible investment-grade rating) with a negative outlook, and any adverse adjustment to this assessment would see the country moved to non-investment grade.

S&P will, during the first week of December, publish its updated official review of the sovereign’s rating, and warned in early October that low economic growth and the threat of political tensions hampering much-needed reforms are challenging the country’s rating.
 
Gordhan led a high-level delegation to New York in early October to convince investors and rating agencies that the government, private business and labour are working together to avoid a rating downgrade. The 2016 mini budget showed National Treasury remains strongly committed – within exiting constraints - to placing the fiscus on a more sustainable trajectory, despite some widely-publicised recent political distractions. 
 
In their assessments of sovereigns, rating agencies consider a country’s institutions, economic scenario, fiscal and debt dynamics, monetary policy and the external environment. If it is assumed that S&P will be happy with the 2016 medium-term budget, that still leaves the economic scenario and quality of institutions to worry about.

Several of the world’s largest rating agencies have in recent months commented that South Africa’s current political situation is pressuring the quality of key institutions – e.g. the National Treasury, Office of the Public Protector, and the judiciary.
 
KPMG currently sees trend lines indicating questions about the quality of institutions, a weak domestic economy and slower global growth, with fiscal and debt dynamics under pressure from this slow growth.

On a positive note, central bank independence and adherence to the monetary policy mandate holds strong. Overall, KPMG still sees a 70% probability of a downgrade by S&P before year-end. The 2016 mini budget is good, but not good enough to detract from the country’s other challenges.
 
Fiscal consolidation
 
On a positive note, recent years' fiscal consolidation will result in a primary surplus during 2017/18 – this means that government revenue will be higher than non-interest spending. This has resulted from expenditure ceilings introduced in the 2015/16 and 2016/17 budgets being enforced and proving effective in curtailing overspending.

When also considering that real government spending per capita has been stable since 2010/11, there is no denying that fiscal consolidation – at a measured and balanced speed - is in place and working.
 
Points of criticism
 
There were three points the 2016 medium-term budget did not touch on that KPMG identified in its 10 points to look for in the statement.

Firstly, the proposed tax on sugar-sweetened beverages has been widely debated in the public sphere due to the expected impact on consumers. Nothing substantial was said about this tax set to be implemented in April 2017.

Secondly, proposed carbon taxes scheduled to be implemented in January 2017 are running into a tight timeline, with a workshop on the modelling of the environmental and socio-economic impact of the tax only scheduled for November.

Finally, the National Health Insurance scheme remains under-emphasised in medium-term budget plans. 

* Christie Viljoen is an economist at financial services firm KPMG. 

* Visit our Budget Special for all the budget news and in-depth analysis.

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