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Mini budget: Not much fiscal room for Nene

Sep 28 2014 15:45
Jaco Leuvennink

Cape Town - Several factors have increased the intensity of the spotlight on Finance Minister Nhlanhla Nene’s first real fiscal move when he delivers the mini budget (medium term budget policy statement) on October 22.

Some of these factors include increasing concern over economic growth momentum, a weak rand and a sudden change of monetary guard, as well as one shock after another over energy supply and costs.
 
A few years ago Matthew Lester, a well known tax professor at Rhodes University, applied the rugby term "suicide pass" to the world of government finances when describing Pravin Gordhan taking over as finance minister from Trevor Manuel.

But now it seems suicide passes have become the norm in South Africa as far as changing of the fiscal guard is concerned. Nene really received man and ball simultaneously.

Manuel himself was appointed in 1996 during a struggling economy and the new government on the verge of a fiscal debt trap amidst high expectations of changed social and reconstructing spending, high interest rates and even higher inflation.

Prudent policies and a steadily growing economy helped him to build quite a reputation (and fiscal maneuvering space) before the international financial crisis struck in 2008/09.

Gordhan took the fiscal baton in 2009 with only a sandy course and obstacles all around him in sight. But he still had some reserve gas to start the turbo’s and dodge most of the obstacles without a dangerous slowdown in economic pace.

Then, after this year’s elections, just when he had managed to build his reputation as responsible and predictable, if not boring, and was supposed to lead the way back to the planned, more trustworthy fiscal position by 2016/17, the ball was passed to Nene.
      
The likable Nene jumped (or rather fell) to prominence (albeit in the comedy stakes) as the financial “chair” person a few years ago. During an interview with the SABC he unceremoniously disappeared behind a table and from the screen when the chair he was sitting on collapsed.

The video of this scene entertained many on the internet who otherwise would never have been interested in state finances.

Now Nene is watched closely again and hopefully for SA this time he will stay on solid ground (or at least a solid chair).

Unlike Gordhan he does not have much fiscal room to move in. That means he can’t afford to borrow much more and politically it will be difficult to either raise taxes or cut spending to close the big gap between government’s income and expenditure. He must also unexpectedly work together with a new Reserve Bank head to stop the downgrading of the rand and the SA economy in general.
 
Nene has already warned that it will be difficult to achieve fiscal targets like bringing the budget deficit to 2.8% of gross domestic product (GDP) by 2016 ( the current figure is around 4%).

But he still maintains that the government remains committed to fiscal sustainability and that, if necessary, “further measures will be taken to achieve our objectives".

Strong foundation

Nene can count on the strong foundation of able departmental officials laid by his predecessors. He has the theoretical economic qualifications and practical experience (as  chairperson of parliament’s finance committee and as deputy minister of finance since 2008).

He will, therefore, be saying the right things.

But does he have the political clout and persuasiveness to take difficult decisions and sell prudence and the financial realities of a complicated world to an ANC government?

Nene’s role in the solving of Eskom’s capital hungry expansion of it’s power generating capabilities is a bit worrisome.

While the government does not have much of a choice in helping Eskom bridge his apparent massive immediate funding gap of R225bn to continue his extension programme, Nene was thus far very vague in how exactly it will be done.

More reassuring and open details will be needed, at least at the time of the mini budget.

Russian deal

The “deal” with Russia to build nuclear reactors in SA and subsequent backtracking by the government, gives the impression that Nene and the Treasury had no input to make regarding affordability.

Not arguing the pros and cons of nuclear power to solve SA’s energy needs, common sense tells you that nuclear power at more than R500bn will put an unaffordable burden on the SA consumer/taxpayer.

Unless big investors are subsidised by the SA consumer (it has been done before), electricity at that price will scare away investors, and frankly any other potential user.

The energy issue is too important to leave to minister Tina Joemat-Pettersson (or Lynne Brown).

Some dangerous risks in the SA economy centre around labour market unrest, rating downgrades, fiscal and monetary slippages, a looming public sector wage review and the health of public sector entities and local government.

Apart from Eskom 40% to 50% of these state entities are in the red, according to the national treasury.
 
Nene has already mentioned the “challenges around local government capabilities” and apparently wants to involve the Development Bank of Southern Africa in local government programs.

Gordhan, now saddled with revitalising local government, are well placed to help Treasury in this regard.

South Africa just managed to avoid slipping into a second recession in five years when the economy grew 0.6% in the second quarter of this year, following the contraction of 0.6% in the first quarter.

The problem for Nene is that treasury’s fiscal projections for the next three years are based on the assumption that the economy will grow by 2.7% this year, 3.2% next year and 3.5% in 2016.
 
Economic growth is the one thing that will ultimately be conclusive in determining if Nene can hold on to the ball and cross the advantage line, or if he will be tackled back (or taken off the field with a stretcher).

 - Fin24

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