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Iraj Abedian from Pan-African Capital provides a rational perspective on how South Africa got into a situation where it has “zero freedom on the fiscal side” ahead of the 2015 National Budget. He offered these and other insights in conversation with Alec Hogg.
Iraj, we always get an insight into the Budget from the State of the Nation Address. Was this year any different?
Yes, except that this year, the State of the Nation didn’t provide any major guidelines on the fiscal side. If you remember the nine-point plan that the Government introduced, it was very loose and generic with very little fiscal implications. One looks for the Budget speech to provide a far more concrete way of our getting our economy out of the limbo it’s currently in.
Last night, I was looking at some of the old speeches and in particular, the one from 2012 when Pravin Gordhan told us that he was expecting economic growth rates. Presumably, the way he was thinking at the time shaped the way that he decided to spend money in the 2012 Budget, and now we’re stuck with a little bit of a problem because the growth hasn’t gotten there.
Absolutely. Post the 2008/2009 global financial crash, all of the G20 ministers got together and they said ‘if Government’s all about spend, spend, spend, they will synchronise global growth’. Of course, Minister Gordhan was no exception. They came home and they started a fiscal stimulus. In South Africa, that fiscal stimulus took the form of wage increases for public servants and increased welfare spend. Those were the two fastest growing items of fiscal spend. Globally, however, the concept of fiscal spend was meant to focus on infrastructure. In other words, the economy would have a bigger capacity to grow. Back home (here) since 2009, we haven’t seen that. We have seen a lot of talk about infrastructure, but very little delivery; most prominently of course, energy. With a lot of other infrastructure, port infrastructure, and rail infrastructure there’s a lot of talk, but very little delivery. As a result, over the past five years we have pretty much squandered all our fiscal space that we had. Our growth hasn’t shown, money is spent and of course, worst of all, the Government’s creditworthiness has been downgraded twice, to one notch above junk status. We find ourselves in a very tight spot.
Iraj, why did the Government take the route that it embarked upon – increasing wages and the social net – both of those being consumption expenditure? Was it politics?
It was a blend of local politics and political hype, globally. As I mentioned, globally, all the G20 talks were about Government spend. Everybody mentioned different things but the concept around spend back home, the politics over 2009 and ever since, the Zuma administration has been around this concept of development of state, meaning the State must be the engine of development. Therefore, State must do whatever it can to promote growth and new development. This means the particular concept of development, for example, hire 260 000 more in the public sector and just because we can. Yes, you can do it, but the wage balloon bloats, three or four years later, it wipes out your fiscal space. Government can increase welfare spend. The age of a child grant, which has been the fastest growing component of welfare spend has gone from 12 to a current level of 17, going on 18. If you’re a young population, that’s the chunk of our welfare spend, so you can certainly do it as a Government. You can increase the age from 12 to 16, to 17 but the minute you’ve done that, you are technically bound by those expenses year-after-year. You have no more control. From a fiscal turning point of view, Government and (most importantly) National Treasury lost control of the drivers of fiscal expenditure.
That sounds as though we’re in a little bit of a spot now, to put it mildly, with the new commitments that have been made. You can’t cut public sector with the wage bill – it would be very difficult politically and clearly, social grants to rewind/unwind that is not going to be easy. How much space does this country have?
Currently, we have zero degrees of freedom on the fiscal side. On the expenditure side, there’s absolutely, zero space in the short term, anyhow. You cannot get rid of Wage Bill or reckless spend. If you looked at the European experience in the 1970’s/early eighties, they had the same dilemma. They had legislated all kinds of fiscal spend that takes anything between seven to ten years, and lots of political backbone and pain to normalise it. Even so, you cannot do it unless and until economic growth on a sustainable basis pans out. Even if you want to deal with it politically, you need economic growth to enable it and that’s where our problem lies.
With this Budget, taking into account the background that you’ve sketched for us, are we likely to see more of the same or has the penny dropped?
I suspect that we’re going to see a case where some mistakes that were made in the past; in order to cover those, we’ll have to make more mistakes. The proverbial saying ‘when you tell one lie, you have to tell ten more lies to cover the first one,’ in the fiscal space, it happens. By that mind, we have squandered our fiscal space. We have found our growth stalling – going from above four percent to below one-and-a-half percent. What do you end up doing? Now, you end up making other mistakes, meaning it’s likely that this year you’ll have tax increases. If you have tax increases though; do you go after the rich? Do you go after the corporates in a milieu when growth is so poor and expectation and confidence, so low ; it’s not a good thing. It’s not going to technically, bring in the money we need and if anything, it’s going to further slow growth. My fear is that this year, we may find this type of so-called fine-tuning or politically driven manipulation of fiscal configuration that would undermine growth further. Otherwise, the only other option there is to do a severe haircut on the expenditure. Frankly, I don’t see the political will in the cabinet, to do that.
Is there an appreciation that the policies of the past have not worked and that something different needs to be tried this time? You know, that old definition of insanity – doing the same thing repeatedly, and expecting a different outcome.
Look Alec, if we listen carefully to the SONA debate (not so much SONA itself, but the post-SONA debate), I didn’t get a sense that any of the ministers were saying we have to rethink. If anything, there was a dogged determination that things are working. My answer to your question is that I do not see or detect any sense that any of the ministers talking about a rethink or, for that matter, the President’s speech did not talk about a rethinking and the SONA speech was about ‘we know what’s wrong. We’re going to be fixing it. It’s going to work, and we’re on the right track’. Briefly, it’s about the development of certain deliveries. You, I, and anybody else who’s a dispassionate analyst would say ‘well, it’s not working because it’s going the wrong way and we are not learning from our mistake’. My fear is that the Cabinet has not yet understood that and importantly, the National Treasury is no longer the National Treasury it used to be. The entire economic policymaking and the centre of fiscal management has been severely diluted and therefore, the political will to do the right thing is simply not there because these are tough things to do.
From an outside perspective, we are expecting more of the same. We’re expecting the Government to say ‘the development state is working’ and ‘okay, we’ve had a hitches on Eskom and labour, but we’re going to fix them. All fixes and I guess there’s an argument for it. However, it’s not addressing the core.
Absolutely. I think Eskom is a good example of why Government hasn’t succeeded in doing the right thing and hasn’t learned. As we speak, there is no recognition that the problem is not with Eskom. The problem is with the National Energy Policy. The cabinet hasn’t carved out a credible, sustainable national energy policy. Therefore, Eskom manifests that, in a way. Eskom has their own problems but South African energy is not about Eskom’s problem. It’s bigger, and that is the absence of a national energy policy. That’s a very good example in other areas, such as labour and infrastructure, and there hasn’t yet been a recognition that there is fundamental need for a fundamental rethink of the way they manage this complex economy.
So grit your teeth. More of the same, unfortunately. Let’s hope for some positive surprise.
Sure, I hope so.
That was Iraj Abedian, and this podcast was made possible by BrightRock, the company that introduced the first ever needs-matched life insurance.
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