Finance Minister Pravin Gordhan.  Picture: AFP PHOTO/MUJAHID SAFODIEN
Finance Minister Pravin Gordhan, centre, attends a press conference in Pretoria. Picture: AFP PHOTO/MUJAHID SAFODIEN

THE director-general of the Treasury, whoever that may be, writes the foreword of the National Budget Review. While the words differ from year to year, the essence is the same: "This budget is a reflection of the expenditure priorities of the government."

For the first time in many years, this year it may carry a slightly different message: "This budget is a reflection of the financial constraints and economic difficulties facing the country."

The economic outlook is dire, with the projected annual gross domestic product growth consensus hovering around 0.8%. It is a far cry from the 5.4% annual growth President Jacob Zuma’s National Development Plan says is needed to improve the lives of struggling South Africans.

Those struggles are reflected in the demands (and sometimes violence) of workers when they negotiate wages, and students who want lower university tuition fees. Since it is a year of local government elections, street protests will accelerate, forcing the government to respond faster and spend more money it may not have.

When Finance Minister Pravin Gordhan delivers his 2016-17 Budget in Parliament later this month, this is the reality he must navigate. He will try to sound both realistic and optimistic. It’s his job. Fresh in the minds of South Africans is the legitimate demand for affordable university education, free for those who are deserving but have no means. Is it possible, though?

Let us use the University of Cape Town (UCT) as an example. For the year ended December 2014, UCT had total recurrent income of R2.3bn, of which R1.1bn came from the state; R1bn was raised through tuition and other income. Salaries cost R1.5bn, R400m more than the state allocated. UCT students received R105m from the National Student Financial Aid Scheme. As this was not enough to support all students with varying levels of financial need, UCT provided R117m in bursaries and loans, while external funders gave R259m.

So let us consider no-fee increases, absorption of contract staff, waiving of registration fees and so on. Let us assume all this happens this year. The students and workers affected will get financial relief, but the funds must be found elsewhere. Now, let us go back to Gordhan and his budget. UCT is not the only university he has to look after, and he doesn’t have much money to pass around. By December, he had a negative budget balance of R173bn. By the end of this financial year, he will have had to pay more than R120bn in interest on the national debt.

In past years, tinkering with taxes and other instruments could do the trick, but not this year. Raising value-added tax by one percentage point, together with personal income tax adjustments, will not raise more than R30bn. That accounts for incremental tax breaks to lower-and middle-class earners to offset inflation. Corporate taxes are declining. That is what an underperforming economy does. Companies are showing flat or declining revenues, higher costs and shrinking profits. Some, such as mining firms, are having to ask shareholders for bailouts, also called rights offers.

In any case, there are many competing priorities over and above the demands of students and universities. The president wants his nuclear deal. It will cost a lot of money. There is clearly not enough money in the coffers to pay for it. So what should Gordhan do? Well, he takes his cue from the president in the state of the nation address. Although the government could borrow significantly more, pay more in interest and risk junk status, the Cabinet failed to take such a decision in its last meeting of 2015. When some ministers kept asking for more money, former finance minister Nhlanhla Nene spelled out the options. They chickened out, and the meeting adjourned without having given final approval to the budget.

Gordhan knows tweaks no longer work. What is needed is deep restructuring of government expenditure. This requires a shift in mind-set, not just in Cabinet, but in the governing party. The trick is to reduce fixed costs such as public salaries and to reduce waste and corruption to free up funds for investment in the future — in infrastructure, education, skills training and incentives for new investments in high-potential, high-unemployment areas in poorer provinces.

This mind-shift requires the pluck of alcoholics admitting at their first Alcohol Anonymous meeting that they have a problem.

It means agreeing to free up the government’s balance sheet from some of the state-owned enterprise debt it guarantees. It means allowing greater private sector participation in infrastructure development.

It means changing many a bureaucrats’ approach to their work, which is that of a stern, mistrusting police officer. In line with the system they operate, they tend to value process over substance, which explains some blockages in private sector investment. But these are political decisions, not those of a finance minister. Gordhan has to make do with what he has. This will be a mixture of stern warnings, a slight financial squeeze here and a breather over there. It’s not sustainable.