A BUDGET is much more than an economic document, with every one giving expression to the political choices of the government of the day.
But Wednesday’s budget is particularly important for being as much about the political metrics as it is about the economic or fiscal ones.
Investors will scrutinise how Finance Minister Pravin Gordhan has managed to make the numbers work in an extremely challenging environment. SA’s economy is hardly growing, the global economy is faltering, and there is no point trying to pretend that growth will pick up to a meaningful level anytime soon.
There has been a pattern of overestimating growth and revenue collections and it will do no good to continue doing so. A credible budget will have to be brutally realistic about SA’s short-and medium-term growth prospects.
Mr Gordhan needs to be frank, too, about the real constraints the government faces given that its debt levels are far too high, and that the targets for bringing these down have been pushed outward and upward many times already.
Whatever he announces tomorrow could tip the balance between an investment grade sovereign credit rating for SA and a "junk" rating. The rating agencies were on SA’s case even before President Jacob Zuma ignominiously fired Nhlanhla Nene as finance minister in December last year.
Though Mr Gordhan was re-appointed to the finance post after four chaotic days in which the rand hit new lows and stocks got hammered, the effect on the currency, bond yields and SA’s fiscal policy credibility has not been lessening.
Rebuilding credibility will therefore be of essence in tomorrow’s budget.
And that means Mr Gordhan not just saying that the government is committed to fiscal rectitude. He has to show in the numbers and the measures he announces that it is committed to closing the gap between spending and taxing, and bringing down the deficit and the debt level sooner rather than later.
There’s been plenty of rhetoric since December about the government’s commitment to fiscal prudence, to boosting investment and economic growth and to partnering with the private sector to achieve this. But tomorrow, markets will be looking for real steps to match the rhetoric.
That will be no easy task. Fixing the fiscal metrics is hard enough. Revenues are likely to fall short of last year’s targets for the next couple of years, and unless Mr Gordhan puts the brakes on spending, the deficit will creep up and the public debt ratio will climb.
That heightens the risk of the rating agencies downgrading SA, setting off a vicious spiral in which debt becomes more expensive, growth slows and the fiscal metrics get even worse.
But narrowing the deficit by curbing spending is politically difficult, given how much of it is public sector pay, social transfers and sometimes just waste. Equally, raising taxes, especially if it is the more lucrative value-added tax option, would be politically difficult. It will also be economically risky given that any significant tax increases will further crimp growth and confidence.
Mr Gordhan will have to show resolve in tackling the fiscal challenges, and that means he has to show that he has the political backing to do so. Otherwise he has little chance of convincing rating agencies or investors and restoring SA’s credibility.
Though Mr Zuma has made broadly supportive statements, he has given Mr Gordhan little substantial support.
That means Mr Gordhan has to make it clear that he does have the backing of Mr Zuma and his Cabinet colleagues to "do what it takes" to stave off a downgrade.
Firm measures to trim the public sector wage bill would be a crucial credibility booster.
So too would clear steps to turn around state-owned companies, particularly the one that is under the Treasury’s control, South African Airways. Announcing a new and competent board for the airline would be a good start. But what is eagerly anticipated is a list of state assets, the national airline included, to be sold off.
Expectations for tomorrow’s budget are high. Mr Gordhan needs to show he and the Cabinet can rise to the challenge.
If investors and the rating agencies are disappointed, SA will pay a very high price.
Pravin Gordhan. Picture: BLOOMBERG/JASON ALDEN
A BUDGET is much more than an economic document, with every one giving expression to the political choices of the government of the day.
But Wednesday’s budget is particularly important for being as much about the political metrics as it is about the economic or fiscal ones.
Investors will scrutinise how Finance Minister Pravin Gordhan has managed to make the numbers work in an extremely challenging environment. SA’s economy is hardly growing, the global economy is faltering, and there is no point trying to pretend that growth will pick up to a meaningful level anytime soon.
There has been a pattern of overestimating growth and revenue collections and it will do no good to continue doing so. A credible budget will have to be brutally realistic about SA’s short-and medium-term growth prospects.
Mr Gordhan needs to be frank, too, about the real constraints the government faces given that its debt levels are far too high, and that the targets for bringing these down have been pushed outward and upward many times already.
Whatever he announces tomorrow could tip the balance between an investment grade sovereign credit rating for SA and a "junk" rating. The rating agencies were on SA’s case even before President Jacob Zuma ignominiously fired Nhlanhla Nene as finance minister in December last year.
Though Mr Gordhan was re-appointed to the finance post after four chaotic days in which the rand hit new lows and stocks got hammered, the effect on the currency, bond yields and SA’s fiscal policy credibility has not been lessening.
Rebuilding credibility will therefore be of essence in tomorrow’s budget.
And that means Mr Gordhan not just saying that the government is committed to fiscal rectitude. He has to show in the numbers and the measures he announces that it is committed to closing the gap between spending and taxing, and bringing down the deficit and the debt level sooner rather than later.
There’s been plenty of rhetoric since December about the government’s commitment to fiscal prudence, to boosting investment and economic growth and to partnering with the private sector to achieve this. But tomorrow, markets will be looking for real steps to match the rhetoric.
That will be no easy task. Fixing the fiscal metrics is hard enough. Revenues are likely to fall short of last year’s targets for the next couple of years, and unless Mr Gordhan puts the brakes on spending, the deficit will creep up and the public debt ratio will climb.
That heightens the risk of the rating agencies downgrading SA, setting off a vicious spiral in which debt becomes more expensive, growth slows and the fiscal metrics get even worse.
But narrowing the deficit by curbing spending is politically difficult, given how much of it is public sector pay, social transfers and sometimes just waste. Equally, raising taxes, especially if it is the more lucrative value-added tax option, would be politically difficult. It will also be economically risky given that any significant tax increases will further crimp growth and confidence.
Mr Gordhan will have to show resolve in tackling the fiscal challenges, and that means he has to show that he has the political backing to do so. Otherwise he has little chance of convincing rating agencies or investors and restoring SA’s credibility.
Though Mr Zuma has made broadly supportive statements, he has given Mr Gordhan little substantial support.
That means Mr Gordhan has to make it clear that he does have the backing of Mr Zuma and his Cabinet colleagues to "do what it takes" to stave off a downgrade.
Firm measures to trim the public sector wage bill would be a crucial credibility booster.
So too would clear steps to turn around state-owned companies, particularly the one that is under the Treasury’s control, South African Airways. Announcing a new and competent board for the airline would be a good start. But what is eagerly anticipated is a list of state assets, the national airline included, to be sold off.
Expectations for tomorrow’s budget are high. Mr Gordhan needs to show he and the Cabinet can rise to the challenge.
If investors and the rating agencies are disappointed, SA will pay a very high price.
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