Minister of Finance Pravin Gordhan (Netwerk24) ~ Netwerk24
FIRST, the good news: The macro-economic backdrop to
this year’s budget speech is not quite as intimidating as a year ago.
Internationally, commodity prices are heading northwards (albeit off a low
base); a moderate improvement in global growth is on the cards; and emerging
economies are looking more appealing than a few months ago.
Here at home, there
are indications that the inflation rate, and possibly short-term interest
rates, have peaked; the severe drought conditions have abated to some extent, and the tour de force displayed of late by the rand exchange rate has
surprised many. All in all, after probably failing to breach the 0.5% mark in
2016, gross domestic product growth could approach 1.5% this year.
However, this relatively sanguine prognosis assumes
the absence of any major economic tremors – and this might be a very brave assumption.
The world and domestic financial and economic systems remain brittle, and could
react negatively, sharply and quickly to any one or more of a number of shocks.
These include the outcome of protectionist/anti-globalisation sentiments in
the USA, Britain, and the European Union; the unknown magnitude and effect of
growing debt levels in China; and the impact of rising interest rates in the
In South Africa, a less benign global outcome would be
aggravated by a renewed weakening of the rand exchange rate; a stubbornly high
inflation rate; stagnating commodity prices; and, above all, political and
policy "noise". Thus, while the contextual environment is somewhat more
favourable than this time last year, the finance minister still has very limited
Different stakeholders (vested interests) have
different expectations, hopes and desires when they reflect upon the
ramifications of the annual Budget Speech. Some embattled political leaders and
millions of cash-strapped, highly indebted consumers are no doubt hoping for an
expansionary budget – the former (politicians) to curry favour with
disillusioned voters, and the latter to improve their standard of living and
quality of life.
However, those in favour of
fiscal austerity would lament a populist approach, and point out
that this would plunge the country ever deeper into a cesspool of unsustainable
and unpayable debt, and an ultimate systems breakdown.
Junk status is sword of Damocles
Somewhere between these two extremes is the call for
fiscal prudence. The arguments for constraint are compelling: the
sword of Damocles (“junk” bond status) continues to hang over our collective
heads. Regardless of the esteem in which they are held, a downgrading by the
credit rating agencies of South Africa’s public debt to sub-investment status will emasculate the economy in a far-reaching and long-lasting way.
Pravin Gordhan and Team SA did sterling work last year in deflecting such a verdict,
but the last thing we need now is complacency. A fiscal framework that does not
maintain fiscal rectitude would virtually guarantee economic stagnation and
prolonged socio-economic suffering.
At the same time, it would be politically untenable to
turn a blind eye to the very real predicament facing millions of South Africans
– poverty, unemployment, and disillusionment. The notion of actually reducing
government outlays on, for instance, education, social grants and health care is, in the circumstances, a ludicrous one.
The challenge, therefore, is to budget for a modest
increase in public spending that favours the poor, without raising the public
debt to a level that would trigger a credit downgrade (also read: bring the
budget deficit as close as possible to 3% of GDP).
In actual fact, we know from
the 2016 mini budget statement that the bulk of the increase in
government spending this year (an estimated R28bn) is to be financed from tax
adjustments. With modest economic growth, organic growth in tax collections
will also be modest.
What we do not know is the nature of these tax
adjustments. The usual increase in “sin tax” rates and the proposed
controversial tax on sugary drinks will not be sufficient. The most efficient mechanism
would be a one percentage point increase in the VAT rate, which could yield an
additional R15bn to R20bn.
Insurmountable resistance to VAT hike
This idea has, however, been met with insurmountable
political resistance over the last two decades, even though the burden on the
poor could be relieved by, for instance, raising social grants and/or expanding
the range of essential goods that are taxed at 0%.
Failing this, the brunt of
the higher tax burden is bound to fall on the private sector – specifically
through a lifting of the maximum marginal rates of tax on personal income, and
possibly the introduction of a “wealth tax”. Higher corporate tax rates might
also be considered.
Other “headline” issues that need to be addressed
include the ownership structure of state-owned enterprises, the nuclear energy
deal, the potential of savings by clamping down on mismanagement, wastage, and
inefficiencies within and by the public sector, and the financial predicament
of many of our university students (and universities). And one would also like
to see that the longer-term objectives as embodied in the National Development
Plan are recognised.
In sum: we can expect the minister to present a
fiscally prudent budget that admits the need to appease the concerns of nervous
investors, but without bludgeoning a fragile and hesitant economic recovery to
death. However, “there ain’t no such thing as a free lunch” – somebody has to
pay the price; and that somebody is most likely to be the more affluent members
Fortunately, this blow could be mitigated to some extent by a
slight softening in monetary policy later in the fiscal year.
The elephant in the room is the future of Minister
Gordhan. If he should be removed from office after the Budget Speech, then very
few, if any, of the positive sentiments expressed above will come to fruition.
* Professor André Roux is an economist at the University of Stellenbosch Business School. Views expressed are his own.
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