AFTER all the hype that preceded it, last week’s budget was something of an anticlimax. Finance Minister Pravin Gordhan delivered the reduction in the fiscal deficit that was demanded.
But he did so without the painful increases in tax or drastic cuts in spending that many analysts had believed would be required. With hindsight, this achievement should not have been a surprise.
It seems that after December’s dramatic events — in which SA had three finance ministers in five days — many commentators forgot that former finance minister Nhlanhla Nene was highly regarded precisely because he had kept South Africa’s finances broadly on track.
Gordhan needed only to continue along the course Nene had already set.
The extremely negative reaction to Nene’s firing was because investors feared his departure signalled the end of the process he had championed to reduce the deficit and stabilise government debt.
It was believed he was fired for refusing to allow reckless spending and because he was determined to end mismanagement of the parastatals.
The return of Gordhan placed a proven champion of fiscal rectitude back in charge. Ironically, December’s drama, and subsequent fear that SA would now be downgraded to junk by the credit rating agencies, strengthened the finance minister’s hand. He was, therefore, able to reduce spending slightly more than Nene had intended.
He was also able to announce the end of government handouts, which the parastatals seemingly believe is their entitlement. And he provided reassurance that the proposed nuclear deal will go ahead only if it is affordable.
Only time will tell whether he is able to deliver on these commitments.
There will be concerns that tax collection in a stagnant economy may be less than the budget predicts. Government’s mettle will also be tested when the first state-owned enterprise arrives asking for a bail-out to avoid bankruptcy.
The budget predicts further deficit reductions in the coming years. Government debt is expected to peak at less than 50% of gross domestic product. The question now being asked is whether this will be sufficient to avoid a credit downgrade.
The job of the rating agencies is to judge the future ability of borrowers to repay their debt. This depends crucially on the future level of that debt.
It also depends on the future income of the borrowers, as this will determine their ability to afford the set interest terms. In the case of countries, future income is determined by growth in the economy. As the economy grows, so does tax revenue.
While the budget provided greater reassurance on future debt levels, it did little to change SA’s sluggish growth prospects.
It could not do so because poor growth is caused by factors that fiscal policy cannot address. The budget could only adjust government spending and taxes.
In so doing, it has provided a more stable platform for future economic growth. Accelerating that growth requires policy changes that are not in the finance minister’s power to deliver.
Faster growth needs many things, including more efficient delivery of government services. It needs swifter processing of business licensing. Competition law needs to be implemented more aggressively so that businesses face greater local competition. Legislation that hampers investment in mining and oil and discourages foreign investment needs to be amended. Our abysmal education system needs to be transformed. Those whose formal schooling is over need to learn meaningful skills.
Gordhan and President Jacob Zuma have started a process of talking to business about what is required to increase private investment and grow the economy.
Hopefully, these will translate into meaningful action.
Such action needs to be swift. Not just so that the rating agencies can revise upwards their views of future economic growth.
It is needed so that the economy can again start delivering the jobs and incomes South Africans need and are loudly demanding.
• Keeton is with the economics department at Rhodes University