Government Committed to Priorities – SA Budget

SA Finance Minister Pravin Gordhan delivered the South African medium term budget statement on 27th October. Government priorities remain social spending, infrastructural expansion and job creation. See Idasa’s comment in the video and statement below.

– By Len Verwey –

Pravin Gordhan became South Africa’s new Minister of Finance under difficult circumstances. Although it appears as though the global economy may be moving out of recession, and that South Africa will soon follow, economic headlines leading up to Tuesday’s MTBPS speech focused on the ballooning budget deficit, the poor performance of tax revenue which is one reason for it, and on what seem to be continuing tussles within government over who should be running the economy.

It was therefore not surprising that the Minister did his best to calm the waters, to insist that in fact everything was under control. The credibility of these assurances, and the degree of fiscal risk South Africa takes on board over the coming medium-term, should inform our discussions going forward, as well as Parliament’s deliberations on the budget.

The basic story is a commitment on government’s part not to cut spending over the coming medium-term, even though tax revenue will only recover slowly from its slump. In fact, tax revenue looks likely to recover more slowly than the growth rate, in part because South Africa’s over-indebted households will not be spending as much for quite some time as they did in the boom years. Thus, we not only get the 7.6% budget deficit which is estimated for the current fiscal year, but deficits of 6.2%, 5% and 4.2% in the following years. Large deficits mean more debt, and the 2009 MTBPS estimates debt stock at 41% of GDP by 2013. This is large by recent South African standards, but not particularly large within the current crisis-response paradigm.

The MTBPS did not contain big surprises as far as allocations are concerned: government priorities remain social spending, infrastructural expansion (much of it led by the state-owned enterprises), as well as job creation. Whilst all South Africans would agree on the importance of these, job creation in particular requires establishing a more inclusive and competitive economy. This will not happen overnight and cannot happen solely through the agency of government.

As expected, the Minister emphasised that government would try to save some money and reduce corruption. There was also a surprising degree of emphasis on improving tax compliance, suggesting that SARS may believe tax evasion has increased in the current harsher economic environment. Emphasising these points is clearly necessary for a government that will not be able to increase its spending much over the next three years  but has to get the most value possible out of every allocated Rand. It is a welcome emphasis and Parliament, the media and NGO’s need to contribute to what may be called ‘value for money’ oversight.

It remains to be seen, though, whether government’s growth and tax predictions have come through these turbulent times with credibility fully intact. The issue here is less the economics of the budget and more its role in enhancing fiscal predictability and transparency. The 7.6% deficit which seems likely for the current year stems from a significant under-estimation of growth, accompanied by a very significant spending increase from 2008/09 to 2009/10. That increase in spending was warranted, and remains warranted, not only because curtailing infrastructure plans would’ve been foolish, but also because increased spending, combined with relaxing monetary policy, is the right way for government to dampen the recessionary shock.

But clearly February 2009’s budget was far too optimistic in its assumptions for 2009/10 growth and therefore tax revenue and therefore the deficit. Then, Trevor Manuel said the economy would grow by 1.4% over the 2009/10 fiscal year. This at a time when the economy had already been contracting for a quarter and was busy contracting at an annualised rate of 6%. Pravin Gordhan now had to take the stage and revise that growth down to -1.6% for the same fiscal year. This kind of divergence exposes how little we understand about the nature of our economy’s adjustments when it comes under strain, understandable perhaps given the complexity of the variables involved. .

Over the next three years, while growth is expected to slowly recover and tax revenue even slower than that, government will keep spending. It does not have a choice, given the poverty, the inequality, and the unemployment that still mar our democracy. When the books are closed on the 2009/10 fiscal year, government spending will have made up about 35% of GDP. Although this ratio will go down over the medium-term, it will not go down below 30% again in the foreseeable future. The MTBPS also makes it clear that, three years from now, South Africa is likely to be significantly more indebted than it has been in some time. These figures point to obvious risks as far as the sustainability of public finances is concerned, but  no clear debt trap or other alarmist scenario awaits us. However, what is required, now more than ever, is value for money. The social and economic stakes may well continue going up under Minister Gordhan’s financial leadership, and effective and broad oversight of public finances must now take center stage in our conversations about how to get from a Finance Minister’s speech to a South Africa that fully meets the aspirations of the Constitution.


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