Budget numbers an indictment of failure to fuel growth

Most analysis of the recent medium-term budget policy statement has focused on disclosures about the deterioration in the government’s finances. This is not surprising as the consequences are very worrying indeed.

As expected, Finance Minister Malusi Gigaba announced that tax revenue would be R51bn lower than budgeted in February. Another shock was the news that the government would make no effort to adjust its spending in line with its reduced income. Spending will now be R4bn more than budgeted, so the deficit will rise to 4.3% of GDP, compared with 3.1% projected in February. Moreover, this gap will continue for the foreseeable future. Spending will rise more than inflation and tax underrecovery is likely to continue. Indeed, the statement warns that revenue shortfalls “may suggest a profound [negative] shift in the relationship between economic growth and tax collection in the years ahead”.

As a result, instead of shrinking to 2.6% of GDP by 2020, as previously forecast, the budget deficit is likely to be 3.9% of GDP. This means the government must borrow more, making it impossible for government debt to level out at just more than 50% of GDP, as promised. It will rise to 61% of GDP in 2022.

In addition, the government has guaranteed much of the debt of the state-owned enterprises (SOEs). The government’s overall liabilities will therefore rise to more than 80% of GDP.

They could be even higher if the budget deficit exceeds new projections. This is possible because the statement optimistically projects spending on public service salaries will not rise by more than 1.5 percentage points above inflation. The combined debt level of 80% of GDP also assumes no more cash injections for struggling SOEs. This seems optimistic.

The medium-term budget policy statement forecasts that GDP growth in 2017 is unlikely to exceed 0.7%. More worrying is its projection that growth will be only 1.1% in 2018, 1.5% in 2019 and 1.9% in 2020. This is a shocking admission of the government’s failure to promote growth. If the forecasts are accurate, growth from 2009 to 2020 will be only 1.5% per annum, less than half the 3.6% annual GDP growth recorded from 1994 to 2008.

That growth has halved is very ironic. Ten years ago, the backers of Jacob Zuma called for his election as ANC president at the Polokwane conference to replace the “failed” policies of Thabo Mbeki with ones that might produce faster growth and more rapid job creation.

It was claimed that previous ANC policies were too marketand business-friendly and that greater government intervention in the economy would change this for the better. Instead, the economic consequences of these changes have been very damaging. The policy statement forecasts that this will continue.

It is helpful to reflect on what such growth forecasts mean in practical terms. There are only two ways in which economies can grow. The first is through the productive employment of more people. The second is when those who already have jobs produce more each year. Increased mechanisation and smarter work practices can easily ensure that the productivity of existing workers rises 1.5% per annum. Yet this is the total level of growth forecast. The conclusion is that the government is not expecting any meaningful increase in employment. Given the rapidly rising number of people looking for work, it means our frighteningly high rate of joblessness will get worse.

Reversing this is critical for the government, but the forecasts suggest little will change for the foreseeable future. Nor does the new minister’s rhetoric provide much comfort. While he at least acknowledged that the government’s relationship with business needed to improve, no substantive action was offered.

All eyes are now on the ANC’s leadership race and the national elections in 2019. Even if these do produce a renewed focus on fixing the economy, the challenges are going to be extraordinarily tough. New leaders will face not only the harsh divides and inequalities of our apartheid past but also the consequences of a decade in which unemployment became much worse.

Turning this around will require really courageous and visionary leadership.

THE ECONOMIC CONSEQUENCES OF THESE CHANGES HAVE BEEN VERY DAMAGING. THE POLICY STATEMENT FORECASTS THIS WILL CONTINUE WHILE HE AT LEAST ACKNOWLEDGED THE GOVERNMENT’S RELATIONSHIP WITH BUSINESS NEEDED TO IMPROVE, NO SUBSTANTIVE ACTION WAS OFFERED