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Cape Town - Tax hikes and spending cuts – fiscal consolidation – should be the essence of the National Budget, to be presented at 14:00 in Parliament by Finance Minister Pravin Gordhan.
This sounds like tough times ahead, but numbers can change or be rectified. Apart from the numbers though, a cloud of political manoeuvring, a policy approach split and an ineffective governing party are creating uncertainty and turning everything grey.
This afternoon will - and should - be about what is politically and financially affordable and what will hurt the economy the least, or rather more positively, what will boost growth the most. Because everybody agrees that it’s all about growth, sustained growth.
What does a growth-orientated budget entail? According to Arthur Kamp, economist at Sanlam Investments, in the current situation it means “ideally to minimise damage to the economy. Fiscal consolidation should focus on cutting expenditure while leaning towards relatively more capital expenditure (including human capital/education) and protecting the government’s balance sheet.
“On the revenue side the tax structure should be aligned to promote savings and investment. South Africa’s dearth of domestic savings is its Achilles' heel. It limits investment spending and job creation.
“Taxes on consumption support the savings objective, while taxes on income are a disincentive to work and invest. This means complementing the government’s promotion of tax-free saving accounts with taxes on goods and services by hiking the VAT rate.”
Fiscal consolidation has been on the cards for a while. Not only to satisfy rating agencies who want to degrade SA’s investment status, but also to create a more stable economic basis.
Gordhan has stated it as a goal and said in October last year that the government needs R28bn of extra income as well as spending cuts of R20bn to counter rising state debt and budget shortages. And he has already proved himself to be fairly consistent, resolute and reliable - not one to experiment too much, or turn in his tracks easily and be blown off course by whims, extravagence or political pressure.
Fiscal consolidation could cost Gordhan dearly
Fiscal consolidation isn't easy and it isn't popular. It may cost Gordhan his job. But it is a given imperative amid the other reality of today's budget, namely the looming political situation and obvious split in the ANC’s thinking on the economy.
First and foremost, and for now in the pound seats, are the presidents men (and women). And let's admit it, on his side are many South Africans who still regard government (ANC) interference as their only salvation. They seem to see the better life around them, and desperately want it for themselves.
President Zuma's recent State of the Nation Address (SONA) stated: “We are starting a new chapter of radical socio-economic transformation… The state will play a role in the economy to drive that transformation… and utilise to the maximum, the strategic levers that are available to the state.”
Really? The ANC has for 23 years tried to achieve economic transformation, or in Oliver Tambo's words, “victory .. that embraces more than formal political democracy… also economic emancipation”. After almost a quarter of a century of ANC rule Tambo’s words, as valid as they may have been, sound a bit hollow.
And the irony is that most of those implicated in the “monopoly on economic power” would dearly like to, and in word and deed already do, constructively support and help to bring about that desired economic emancipation.
It is so obvious that the economic wellbeing and progress of the vast majority of South Africans will benefit and is in the interests of all honest, hard-working South Africans - especially business, investors, minority groups and the rich - that it boggles the mind that anybody can even be regarded as standing in the way of achieving this goal, let alone deliberately jeopardise it.
Zuma’s party stuck at groundbreaking
As aptly expressed by FNB chief economist Sizwe Nxedlana: “No one disagrees with supporting new entrants, small business and people of colour. Accelerating diversification and increasing competition in the economy is a win-win for everyone.” Zuma’s party is not busy with groundbreaking stuff. They got stuck at groundbreaking.
The problem is how to achieve this goal in a sustainable way. The government (state) can’t force quick radical economic emancipation. It can only enrich a small group of politically connected people. Radical economic and social engineering by the state can only achieve slow eradication of wealth and eventually radical impoverishment for all but a small elite. It has been proven in different circumstances in different countries all over the world.
But Zuma and his followers want to prove it all over again.
Today's budget can only help create an encouraging environment where resources are allocated wisely and fairly, so that wealth can be created and growth achieved. Gordhan and the Treasury have shown balance and an understanding of the realities of the modern economic environment in their approach and the carefully compiled numbers and allocations they regularly produce.
Policy, regulations and the conduct of political leaders should promote fixed investment which is the cornerstone of sustainable growth rather than cyclical, artificial or temporary improvements.
Few South Africans wouldn't want “to heal the divisions of the past and establish a society based on democratic values, social justice and fundamental human rights” (from SONA), or a society with plenty of jobs, and a national airline, broadcaster, police, universities and sports teams to be proud of.
But then you can’t start with calls for patriotism and unity, surrendering of rights “for the good of all”, restitution, unconditional support for affirmative action that does not work, the (mis)use of state institutions to create jobs and redistribute wealth, and chasing one-sided political goals.
If a national sports team wants supporters and to make people proud, patriotic and play a role in uniting the country, it can’t start with an emotional appeal for united support and patriotism, using crude words at send-off parties for motivation. They must concentrate on doing well on the field - and the support and pride will be there.
Likewise, politics is not what most people care about. They care about effective and fair government and services. And often you can't chase political goals and be effective and fair at the same time. Do your basic task well and the rest will follow.
Not all gloom and doom
To conclude, politics aside it is not all gloom and doom. As Kamp pointed out, the “improvement in the primary budget balance (revenue less non-interest spending) over the past four years to an estimated -0.4% of GDP for fiscal year 2016/17, from a deficit of -2.7% of GDP in 2012/13, is a clear statement of intent. It is also a remarkable achievement in a low-growth environment with an excessive unemployment rate and rising demands on state resources.
“The consolidated government spending ratio is excessive at 33% of GDP and state debt remains a burden, but the Treasury’s track record in containing expenditure has improved in recent years."
Growth may pick up a bit this year and Kamp says some of the “key building blocks are falling into place to return South Africa to fiscal sustainability”.
Then again, it is not only about the numbers. The question of Pravin Gordhan remaining finance minister and who will eventually succeed him, have become as important as the numbers.
Nevertheless, you can’t start without the numbers, or the money. Only firmer economic growth can make the fiscal numbers add up. And to achieve that, the politics and executive competence should fall in line as well.
* Visit our Budget Special for all the budget news and in-depth analysis.
