Gordhan's juggling act

2011-02-22 11:24

FINANCE Minister Pravin Gordhan has to juggle the need to stimulate economic growth with the need for fiscal prudence in his budget  on Wednesday.

The chances are good that he won’t drop one of the balls.

The need to stimulate economic growth and create jobs isn’t only politically important in a year which sees municipal elections, but also significant for an economy that’s just sputtering along.

True, the most important driver of economic growth and jobs is the private sector, but companies have been cautious about hiring and investing.

In such a scenario, it’s up to the government to take up some of the slack.
However, there are limits to what it can and should do. If it tries to do too much, it risks ending up in a debt trap, where it just borrows money to pay interest with little else left to spend on the necessities.

If it tries to ignore the debt trap, the Zimbabwe crisis option awaits.
Nowhere was the need for prudence in government’s fiscal policies illustrated more aptly than during the European sovereign debt crisis.

All over the world, there are concerns about fiscal deficits and government debt. Wednesday’s budget is delivered against a backdrop of strong global focus on these issues.
That’s why, unsexy as it may be, the most important story on budget day is what is happening to the deficit and to government debt.

Yes, you may be more interested in personal income tax changes or sin taxes, but ultimately the deficit will show whether the country’s future is being mortgaged, and for this reason it’s very important.
Globally, fiscal deficits rose during the recession as governments announced bailout packages, tax revenue dried up and banks failed.
 SA didn’t have the bank failures, but it did have the bailout and the vicious fall in tax revenue, resulting in a deficit of 6,7% of gross domestic product (GDP) in the 2009/10 fiscal year.

This was budgeted to fall to 6,3% of GDP in the following fiscal year, but latest estimates put the deficit at 5,3%, or R143,1bn in the current fiscal year.

Globally, there seems to be two extremes in the way deficits are being managed. There are the loose policies of the US, where additional fiscal stimulus was announced at the end of last year.

Not much room to manoeuvre

Japan also has a notoriously high government debt-to-gross domestic product (GDP) ratio, but this is funded largely by Japanese money with little dependence on the outside world.
On the other hand are the extreme policies of Britain and Germany, neither of which was forced into the kind of masochistic government austerity they are both implementing.

In Britain, the VAT rate was raised and benefits cut, with spending slashed across the board. In Germany, too, spending cuts are vicious.
Both countries want to stand out from those in Europe that have been forced into accepting bailouts from the European Union and the International Monetary Fund.

Greece with a bailout of €100bn and Ireland with a bailout of €85bn stand out.

But Italy, Portugal, Spain and Belgium have also been in the spotlight. Some commentators believe the crisis isn’t over yet, and that Greece and Ireland will both ultimately default on their debt, leading to a restructuring and losses for bond holders.

In that situation, the cost of their debt will rise significantly, as bond holders price in the possibility of future defaults.
SA doesn’t have the same problems as Ireland and Greece. Unlike Ireland, its banking system is in good shape.

And unlike Greece, it started off the recession with debt at low levels. The country also has a tax base that is in much better shape than Greece.
Still, this doesn’t mean that warning lights shouldn’t be flashing for SA. Where the focus should lie is on interest expenditure, which is set to rise by an average annual rate of 16.7% between 2010/11 to 2013/14.

This means that average real growth in government non-interest spending over the next three years has to be contained to 2.7%. This is a far cry from the levels of around 8% seen in the boom years.

It’s clear that government has very little room to maneouvre because of the high cost of servicing state debt built up during the recession.
From that it’s obvious that there’s very little scope for meaningful reductions in personal income taxes. In fact, when the National Health Insurance (NHI) is factored in, personal income taxes will rise.

The NHI hasn’t yet been budgeted for, so the picture painted in the budget will change drastically from 2012, when the NHI is supposed to start.
In the short term, don’t expect personal income tax to do more than compensate for fiscal drag, if that. SA has a deficit to cut, and if Gordhan is going to stick to the targets he set in his mini-budget, as expected, he has little room to maneouvre.  

  • Barend - 2011-02-22 17:07

    The people are hungry:it is because those in authority eat up too much in taxes. Lao Tzu

  • Concerned - 2011-02-22 21:20

    So it is hopeless?

  • Nasdaq7 - 2011-02-23 06:14

    It is ridiculous to implement NHI if 32% of the people are out of work. Essentially the taxpayer will give free health care to 32% of the people. That is an extra tax burden on the economy, not to mention the Gauteng toll gates which will just increase the cost of doing business in Gauteng. All this is money that should have been spent to create jobs - it will now take away money and jobs from the private sector and increase taxes. The more you tax the people, the less money there is to start up businesses and the less money there is to spend at businesses. Less jobs each year means more tax is needed. And the cycle continues. A short-fall in taxes leading to more tax increases. The key is to use tax money efficiently. To produce something. Now we will give away free health care to unemployed people. They will be healthy and still unemployed. Cut business taxes to spur growth. Stimulate businesses and production, not expensive consumption. And medical aid is about as expensive as consumption as you can stimulate. Stimulate jobs not taxes.

  • Bob - 2011-02-23 15:16

    Greta, how about informing everyone that the central bank is a privately owned corporation with a monopoly on the issuing of money not the government. That SARS is also the privately owned debt collection agency. Maybe you could also inform them of how all "money" comes into existence from loans. Loans with collateral and interest. You could inform then their income tax goes to paying the interest on these loans. Something that wouldn't exist if government issued the money.

  • chris - 2011-02-23 15:26

    Greta, If money is issued by private banks not the SA government and Government bonds are backed by the labour of the South Africa people, then isn't the bond market nothing but the buying and selling of people? A modern day slave labour market.

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