OPINION: #Budget2016 Again, more of the same
The Budget for the year 2016/17 is substantially not different from previous Budgets. Yet, surprisingly this time all political parties in Parliament commended it. In exactly the same way as with previous Budgets, this Budget is framed by the Minister of Finance as "a budget for inclusive growth, it emphasises partnerships amongst role players in our economy, it prioritises education and infrastructure investment, it supports employment creation and it contributes to building a capable, developmental state".
The minister's overarching strategy to "support employment creation" is to freeze public sector employment and to embark on a real cut of government spending. These interventions are meant to boost "business confidence", which is believed to be the source of growth. A fiscal contraction, the cutting of public sector demand, is believed by policymakers to be expansionary. A closer look at the Budget framework shows that this Budget mainly serves to reproduce the structural problems faced by the South African economy. This Budget is likely to drive the economy into a recession; it is pro-cyclical and it is likely to worsen de-industrialisation.
Two fundamental problems confront South African society: a) an economy in which the decisive sectors are increasingly foreign-owned and b) an economy whose production structure is based on mineral exports and which is dominated by unproductive sectors such as finance, real-estate and wholesale and retail trade. The major banks, large companies and the mines have significant foreign-ownership. The implication of this is that the profits these companies generate tend to be sent abroad, instead of being used to further finance domestic investment. More than 60% of the deficit on the current account is accounted for by legal outflows related to foreign ownership. The manufacturing sector, which is supposed to be the mainstay of South Africa's industrialisation, has been shrinking from above 20% of GDP in 1994 to below 13% of GDP in 2014 and dependence on mineral exports means that much of the country's fortunes lie with the market-determined and volatile commodity prices. The fact that the country imports even the most basic manufactured items adds pressure on the current account.
Excessive foreign ownership, with its associated expatriation of profits, means that South Africa suffers a chronic savings deficit. The touted benefits of foreign direct investment, such as skills transfer, technological upgrading, export market access, employment, etc., do not outweigh the losses suffered through the resource leakage from the current account. The deficit on the current account directly mirrors the savings deficit in the private sector, indicating that indeed, the country's ability to finance its domestic investment is constrained by foreign ownership. The relaxation of exchange controls, much as it is touted as international good practice, only serves to constrain macroeconomic policy by making financial markets dominate the policy direction.
To finance the savings gap and the current account gap, the country has to now rely on foreign capital inflows. However, these inflows are themselves volatile and require relatively high interest rates to be attracted. This, in turn, reinforces the increase in the country's foreign debt, which later on feeds into the country's risk premium, and further dissuades capital inflows. Profit outflows also put pressure on the exchange rate, which pushes up inflation because, with a failing manufacturing sector, the country is heavily dependent on imports. The risk premium together with rising inflation then push up the interest rate, especially because the central bank follows inflation targeting. All these developments imply a slowdown in economic growth.
It is within this context that the minister tables his Budget. Faced with a current account deficit which is 4% of GDP, the minister attempts in this Budget to build up some savings in order to close the structural imbalances. He does this by increasing overall non-interest government spending by 6.3%, which is less than inflation, while interest payments increase by 11%. This is a real contraction of 0.5%. Social spending also experiences a real contraction of 2%. One of the major ways in which this will be achieved is through a freeze on the public sector wage bill, which amounts to a freeze on public sector employment. The overall fiscal stance is a 0.4% primary surplus, in the midst of rising unemployment, shortages of nurses and teachers, crises in universities, crumbling infrastructure in health facilities, houses, bulk infrastructure, etc. and in the midst the slowdown in economic growth. This stance is pro-cyclical rather than counter-cyclical, which means that it will likely reinforce the slowdown and a steady shift towards a downgrade.
A major constraint that fiscal policy also faces, which forces the minister to run primary surpluses in the face of major social deficits, is the gap that exists between the real interest rate and the growth rate. This gap has very much to do with the monetary policy framework and, again the ownership structure of financial institutions. In particular, the gap between the real bond yield and the growth rate is roughly 1.7%. This positive gap puts upward pressure on public debt, which is another factor that forces the minister to run primary surpluses. A monetary policy framework that is developmental would open space for a developmental fiscal stance. However, this is not the case, the interest cost of public debt remains the fastest growing item in the budget, and it poses serious constraints on the fiscal stance.
The effect of this real contraction in government spending will be a further decline in aggregate demand, which is a major driver of the growth rate at this point. It is therefore surprising that National Treasury projects an increase in the growth rate of 1.7% in 2017 and a 2.4% in 2018, while at the same time it projects rising primary surpluses over the same period. In his speech, the minister thinks that growth will come from "business confidence"; however, even if we believe National Treasury's optimistic projections, these figures clearly show that growth will not be sufficient to reduce unemployment, given the existing ownership and production structure of the economy.
The major cuts in the Budget are precisely those that are meant to support industrial development. For the year 2015/16, Industrial Development, Trade and Innovation were allocated R69.7 billion, while this Budget allocates R51.7 billion. This is likely to reinforce de-industrialisation. There is no commitment to ensure that 70% of the state budget is targeted towards local procurement, and for the private sector to adhere to this. This reprioritisation of the Budget will not resolve the underlying problems that face the South African economy: a persistent current account deficit that drags down economic growth and a weak manufacturing base that makes the country to be import-dependent. Like all the Budgets before it, this one too lacks the necessary urgency to radically transform the South African economy.
The proposal to introduce the private sector inside state-owned enterprises, through concessions and 'co-funding', while it would seem as if it closes the funding gap in the short-term, it will further worsen the current account imbalance in the medium to the long term by reinforcing foreign ownership. The outcomes will be much the same as those that arose from the partial privatisation of Telkom, Iscor and Sasol. Furthermore, as we have seen with all these strategic former state-monopolies, partial privatisation will close any possibility for these state-owned enterprises to be restructured so that they effectively fulfil their broad developmental mandates. At this point, without any concrete proposals to radically change the ownership patterns and the production structure of the economy, the vast majority of South Africans must continue to endure high levels of unemployment, poverty and inequalities. Given how timid these Budgets have turned out to be, only a major recovery in the world economy, which itself is failing, could provide some semblance of respite for South Africans. Christopher Malikane is associate professor in the School of Economic and Business Sciences at Wits University.
Christopher Malikane is associate professor in the School of Economic and Business Sciences at Wits University.