Will Gordhan stick to sound principles?

2014-02-17 16:56 - Jaco Leuvennink
Finance Minister Pravin Gordhan. (File, Sapa) ~ SAPA
Cape Town - With probably the most interesting and tensely fought election since 1994 only about three months away, the National Budget speech on February 26 may have more of a political ring to it than usual.

The fiscal and economic environment is very tough and Finance Minister Pravin Gordhan’s big task will be to boost the confidence of investors, business, consumers and rating agencies.
Will he be brave and keep to sound (and maybe unpopular) fiscal principles, maybe raise VAT and give real flesh to start implementation the National Development Plan (NDP) – only briefly mentioned by President Jacob Zuma in his State of the Nation address in parliament?

Or will it be a typical election budget aimed at the majority of voters with announcements like substantially increased social spending and tax raises only for companies and people in the high income brackets?

Don’t expect too much fireworks. Into his fifth (and perhaps last budget speech) Gordhan is established as someone who does not rock the boat easily.

His style is not to surprise. Words like hardworking, stability, soundness, balance, reliable, etc. are since his days as tax collecting chief associated with the minister.

Perhaps the perfect technocrat, but definitely with enough political savvy to paint every controversial move with an excessively rosy colour.
Zuma’s speech put much emphasis on the economy, but consists mainly of a rattling off of past achievements with very little said of future plans or what the first five year strategic implementation of the NDP will entail.

The NDP is SA’s 30-year growth and development strategy, proposing ways to eradicate poverty and create millions of new jobs by 2030.

There will be expectational pressure on Gordhan to give more detail and address the issue of proper spending (use) of allocated money.

The Americans like to say: It’s all about the economy stupid. Or nearer home is the outspoken economist Dawie Roodt who often stresses that the choice on Election Day is actually on what kind of budget you want.

Politics and the economy (bread and butter issues; or how your tax money is allocated) are intertwined. Therefore expect something of both in the budget.
But Jac Laubscher, respected chief economist at Sanlam, was also right when he reacted with some irritation on arguments that Gordhan could not tighten fiscal policy in an election year.

He said it is about time that sound economic principles are given priority over party-political considerations when it comes to economic policy, to which one can only say amen.

Professor Andre Roux, economist at the University of Stellenbosch Business School, said the following put pressure on Gordhan and limit his moving space:

- A tax base that grows too slowly. Economic growth may be lower than projected because the effect of higher interest rates has not been factored in.

- The increasing debt component. At approximately 45% of GDP state debt and debt servicing costs are still manageable, but can’t be allowed to escalate further. The same applies to the budget deficit of more than 4% of GDP. The depreciation of the rand also affects the debt position although only about 9% of the state debt is in foreign currency.

- Socio political pressures. There are huge social needs, and it is imperative that job creation, productivity and thus growth will be boosted. Investment and a productive happy workforce (that does not strike ever so often) is an absolute prerequisite for growth and job creation.

- There are high hopes on the NDP. But there are rumours that Gordhan and Planning Minister Trevor Manuel, the strongest supporters of the proper implementation of the plan, may not be in the cabinet after the election.

- The medium term (three years) budget process is aimed at stability and predictability. Only minor adjustments to figures are the rule.

Roux thinks the budget deficit may be a bit higher than expected and come down a bit slower over the term of three years.

The budget will probably follow the tone of the State of the Nation address – namely that in spite of mishaps, external dangers and remaining misfiring parts, many economic successes have been accomplished.

Gordhan will most likely also state that the economy is not in a bad shape. But what is imperative is that Gordhan restore the confidence of South Africans and overseas investors through real incentives and credible sound fiscal figures.

Then investment and hard work will follow. Only then growth will accelerate, but many companies sit on big cash piles instead of investing capital. Dissaving by the government does not help either.

Gordhan will again be tested in this time of strife.

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