OPINION: #Budget2016 Plugging the Zuma deficit
No-one can really envy Finance Minister Pravin Gordhan right now. His Budget speech this week might well be one of his most important. Given the circumstances surrounding his reappointment, Gordhan will need to placate a range of stakeholders from business to markets and above all, citizens feeling the strain of rising prices and deepening inequality.
The economy was the centre-piece of President Jacob Zuma's State of the Nation Address (Sona). This was entirely appropriate, though we look to Gordhan to provide the assurances that government will do as it says it will and also to provide meat around the bare bones of Zuma's speech. In a sense, the credibility deficit Zuma has will be Gordhan's to fill.
In the Sona debate this past week Minister of Economic Development Ebrahim Patel berated those talking the economy 'down'. Yet, the facts are hard to avoid. The World Bank projects 0.8% growth for South Africa in 2016 and the Reserve Bank projections are along those lines too. The harsh reality is that for the national development plan's unemployment target of 14% to be met by 2020, South Africa has to grow by 5% per annum.
Given the unceremonious axing of Nhlanhla Nene last year, however, we now have far more to fix than we should have. So how can Gordhan, now with his hand firmly on the tiller, yet with far less to work with, placate the markets and, most importantly, citizens who still seek a decent life and an education to liberate and advance themselves?
As a consequence of the recent downward revisions of South Africa's GDP growth outlook to below 1% for 2016, the rapid depreciation in the rand and higher inflation outlook, the market has high expectations of Gordhan's Budget speech on 24 February. The general perception is that this Budget speech can save us from an almost inevitable downgrade by the ratings agencies. One notch down by either Moody's or Standard and Poor's will disqualify the country from investment grade. What this means, in effect, is that everything starts costing more.
So, what are Gordhan's choices where there really are no rabbits to pull out of the hat?
To simply balance the budget, Gordhan will have to go back to the basics of reigning in expenditure and generating revenues. In his Sona, Zuma provided a laundry list of areas in which the state would make savings. Of course, the larger question is, "who is actually in charge here?" and who will crack the whip and keep an eye on the president himself? Gordhan can speak with greater credibility given the circumstances of his reappointment, yet government is a big machine. We have, after all, also heard this before, yet no-one seems to be able to stop the runaway 'gravy train' that many of Gordhan's Cabinet colleagues and the president himself are on.
Patronage politics has become the order of the day and the credibility of this Budget speech will lie as much in complex numbers as they will in the ability of government to do what it promises and take tough decisions. Tough decisions regarding state-owned enterprises (SOEs) should also surely be on the cards? During the Sona, Zuma said that SOEs should be financially stable, yet Gordhan will be acutely aware of SAA's financial woes as well as the failed corporate governance it faces, along with other SOEs. When the tough decisions regarding chair of the SAA board and SABC head Hlaudi Motsoeneng must be made, will they be made and who will make them? This is clearly where the rubber will hit the road for Gordhan and this government's fiscal credibility.
Much has already been said about the public sector wage bill, yet this seems an almost immutable part of the South African political and economic landscape. Interestingly, of course, the Sona was clear on the concerning question of nuclear expenditure and that South Africa will only enter into a nuclear deal if it was affordable. The brazen hijacking of the National Treasury in December was largely rumoured as linked to the nuclear deal and the potential benefits to the president and his cronies. A test of Gordhan's mettle will be whether he is able to harness the political heft to say no to expenditure which may bind us ad infinitum.
Of course, cutting costs is one thing, but the more salient question is, how in this environment do we generate revenue? It is hard to imagine that in an election year, the government would want to implement an increase in VAT and risk alienating its base. This leaves Gordhan with a couple of other options: a possible increase in the marginal tax rate and/or increasing the fuel levy.
Any tax increase will have a detrimental impact on an already constrained consumer though and so Gordhan will want to tread carefully. South Africa's lower growth scenario finds our finance minister caught in between the proverbial rock and a hard place therefore: lower growth has a negative impact on corporate tax income, while increasing corporate tax could have a negative effect on growth. And lest we forget, Standard and Poor's has unequivocally stated that they are looking for economic growth before they will consider leaving well enough alone.
On the surface, it feels as though Gordhan is in a precarious position and there is little he can do to be hugely impactful. However, there is another school of thought that suggests government should be selling off SOEs as a way to raise cash and up the ante on efficiency. Needless to say, the ideological debate on the big 'P' of privatisation will be bruising. Just last week government delayed the implementation of the Taxation Amendment Bill to March 2018 as a direct result of Cosatu's opposition. So, will it be able to stare down the unions on the thorny issue of privatisation, one has to wonder? Also, it's an election year.
So while staving off a downgrade will be Gordhan's immediate challenge, the structural challenges the economy presents, together with the deepening levels of inequality which threaten our social compact, will need a creativity which perhaps goes beyond this single speech.
Judith February is based at the Institute for Security Studies. Follow her on Twitter:_ @judith_february_