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Cape Town - Lower economic growth forecasts and the resultant adjustment of the budget deficit and debt burden over the next budget period of three years will be the hard realities Finance Minister Pravin Gordhan will have to try and counter in Wednesday’s medium-term budget policy statement (MTBPS).
Gordhan received what Professor Matthew Lester of Rhodes Business School called the biggest hospital pass in tax history when he took over from Trevor Manuel as minister of finance in 2009.
Manuel could cruise along in his later years as long-standing finance minister with annual growth rates of 4% and more, and a growing tax base producing growth in tax collection of around 12% per year. The lesser need for loans reduced the debt burden considerably and wiped out the budget deficit.
But in the last four years Gordhan had to cope with the changed international scene and local economic problems of low and unsustainable demand-driven growth, too little investment and vulnerability because of reliance on foreign capital inflows, lack of functional government.
Perhaps most important of all were policy confusion, lack of political leadership and government’s adversarial approach to the private business sector.
The result: growth in tax collections has dropped to around 8% per year, while government spending was still significantly curtailed. Manuel’s surplus is long gone.
The debt burden and budget deficit have advanced to a stage where the International Monetary Fund (IMF) in its annual Article IV country report on SA started warning about fiscal stability.
The IMF urged structural reforms to boost economic growth and create jobs for a growing population. The report stated that SA has one of the lowest labour participation rates in the world.
The same applies to “the creation and survival rates of SMEs (small and medium enterprises)”.
Furthermore, "public consumption and, to a lesser extent, public investment in large infrastructure projects supported the economy, accounting for nearly 40% of growth since 2009".
But what can Gordhan do? Economists - and pure logic - tell us that he will have to rein in government spending (or raise taxes, which will only be on the table in February’s main budget). But in an election year that is politically problematic.
The IMF says that if such growth issues persist (and they, as well as commentators like Peter Attard Montalto of Nomura, think it will), additional fiscal measures are needed. Montalto says on this point he has difficulty seeing action.
Gordhan has so far used the “get out clause in Article IV” that states that counter-cyclical policy is the right way to go with lower growth projection, to justify fiscal deterioration. He will keep on utilising it.
But Montalto and other commentators want Gordhan to at least show investors and the business community that he will start addressing policy and fiscal stability problems.
They think Wednesday’s mini budget, the second budget document since the national development plan (NDP) was adopted by the ANC and cabinet, may contain proposals to align policy to NDP implementation, and show how individual budget lines over the next three years will fit in with the NDP.
Montalto expects Gordhan to firmly though subtly plant his and the National Treasury’s flag in the NDP debate on the side of the national planning commission and against Cosatu.
He also expects further backing of the youth subsidy bill (which has finally just entered parliament three years after being announced). Measures on improving SMEs will also be welcomed.
Montalto says a simple way to judge Gordhan and the NT’s reaction on the problems facing him is to see the amount of blame put on external as opposed to domestic causes for SA’s current growth malaise.
“Pres (Jacob) Zuma in his speeches has the balance at arount 85:15, Gill Marcus and the Sarb (South African Reserve Bank) are at 30:70 and we suspect the NT and MTBPS will be around 50:50 (we would be around 25:75).”
Gordhan is known to be uncomfortable with SA’s dependence on foreign capital and lack of savings (about 14% of GDP to a preferred 25% of GDP).
Of the so-called twin deficit problem, the sticky current account deficit has been much brighter on the radar screen than the fiscal deficit, largely because of the effect the US “tapering” of monetary stimulation will have on SA.
Thus, according to Delia Ndlovu, director in taxation services at Deloitte, the mid-term budget presents an ideal opportunity to take further concrete steps in encouraging and fostering a culture of savings in SA.
Although tax issues will only be dealt with in February, she suggests indications of tax relief on pension savings and raising the maximum amount that an individual can contribute to a tax preferred savings account.
Although few substantive announcements are expected this week, it will be interesting to see how Gordhan reacts to avoid the obvious potholes and slippery slope all around him.
Should we hope for some more fireworks than in February’s “stabling” budget, or will it lead to a more slippery path?
- Fin24
Gordhan received what Professor Matthew Lester of Rhodes Business School called the biggest hospital pass in tax history when he took over from Trevor Manuel as minister of finance in 2009.
Manuel could cruise along in his later years as long-standing finance minister with annual growth rates of 4% and more, and a growing tax base producing growth in tax collection of around 12% per year. The lesser need for loans reduced the debt burden considerably and wiped out the budget deficit.
But in the last four years Gordhan had to cope with the changed international scene and local economic problems of low and unsustainable demand-driven growth, too little investment and vulnerability because of reliance on foreign capital inflows, lack of functional government.
Perhaps most important of all were policy confusion, lack of political leadership and government’s adversarial approach to the private business sector.
The result: growth in tax collections has dropped to around 8% per year, while government spending was still significantly curtailed. Manuel’s surplus is long gone.
The debt burden and budget deficit have advanced to a stage where the International Monetary Fund (IMF) in its annual Article IV country report on SA started warning about fiscal stability.
The IMF urged structural reforms to boost economic growth and create jobs for a growing population. The report stated that SA has one of the lowest labour participation rates in the world.
The same applies to “the creation and survival rates of SMEs (small and medium enterprises)”.
Furthermore, "public consumption and, to a lesser extent, public investment in large infrastructure projects supported the economy, accounting for nearly 40% of growth since 2009".
But what can Gordhan do? Economists - and pure logic - tell us that he will have to rein in government spending (or raise taxes, which will only be on the table in February’s main budget). But in an election year that is politically problematic.
The IMF says that if such growth issues persist (and they, as well as commentators like Peter Attard Montalto of Nomura, think it will), additional fiscal measures are needed. Montalto says on this point he has difficulty seeing action.
Gordhan has so far used the “get out clause in Article IV” that states that counter-cyclical policy is the right way to go with lower growth projection, to justify fiscal deterioration. He will keep on utilising it.
But Montalto and other commentators want Gordhan to at least show investors and the business community that he will start addressing policy and fiscal stability problems.
They think Wednesday’s mini budget, the second budget document since the national development plan (NDP) was adopted by the ANC and cabinet, may contain proposals to align policy to NDP implementation, and show how individual budget lines over the next three years will fit in with the NDP.
Montalto expects Gordhan to firmly though subtly plant his and the National Treasury’s flag in the NDP debate on the side of the national planning commission and against Cosatu.
He also expects further backing of the youth subsidy bill (which has finally just entered parliament three years after being announced). Measures on improving SMEs will also be welcomed.
Montalto says a simple way to judge Gordhan and the NT’s reaction on the problems facing him is to see the amount of blame put on external as opposed to domestic causes for SA’s current growth malaise.
“Pres (Jacob) Zuma in his speeches has the balance at arount 85:15, Gill Marcus and the Sarb (South African Reserve Bank) are at 30:70 and we suspect the NT and MTBPS will be around 50:50 (we would be around 25:75).”
Gordhan is known to be uncomfortable with SA’s dependence on foreign capital and lack of savings (about 14% of GDP to a preferred 25% of GDP).
Of the so-called twin deficit problem, the sticky current account deficit has been much brighter on the radar screen than the fiscal deficit, largely because of the effect the US “tapering” of monetary stimulation will have on SA.
Thus, according to Delia Ndlovu, director in taxation services at Deloitte, the mid-term budget presents an ideal opportunity to take further concrete steps in encouraging and fostering a culture of savings in SA.
Although tax issues will only be dealt with in February, she suggests indications of tax relief on pension savings and raising the maximum amount that an individual can contribute to a tax preferred savings account.
Although few substantive announcements are expected this week, it will be interesting to see how Gordhan reacts to avoid the obvious potholes and slippery slope all around him.
Should we hope for some more fireworks than in February’s “stabling” budget, or will it lead to a more slippery path?
- Fin24
