Gigaba ready to tackle fiscal fiasco
• Minister has so far made a good show of being indecisive. That is going to change, he says
Finance Minister Malusi Gigaba sits with some sizeable problems: a stagnant economy, rising debt, a huge revenue shortfall, the risk of a default by Eskom, a national airline bleeding cash and the threat of a ratings downgrade by Moody’s Investor Service at the end of February. Add to this his credibility problem — SA has been downgraded twice by S&P Global and once by Fitch since he became minister in March — and the political adventurism of President Jacob Zuma, who put him there, and he is in a difficult situation indeed. His first response, in the medium-term budget policy statement in October, was not to act. For that he has been punished by the ratings agencies and investors. Now back from a three-continent investor roadshow, Gigaba has been galvanised into decisiveness. “My view is we need to take the difficult decisions and take them now,” he said in an interview on Friday.
Finance Minister Malusi Gigaba sits with some sizeable problems: a stagnant economy, rising debt, a huge revenue shortfall, the risk of a default by Eskom, a national airline bleeding cash and the threat of a ratings downgrade by Moody’s Investor Service at the end of February.
Add to this his credibility problem — SA has been downgraded twice by Standard & Poors Global and once by Fitch since he became minister in March — and the political adventurism of President Jacob Zuma, who put him there, and he is in a difficult situation indeed.
His first response, as he faced the medium-term budget policy statement in October, was not to act. For that he has been punished by the ratings agencies and investors. Now back from a three-continent investor roadshow, Gigaba has been galvanised into decisiveness.
“My view is we need to take the difficult decisions and take them now,” he said in an interview on Friday.
“Any further delay is going to be felt immediately. We need to decrease the budget deficit, and unless we are able to cut the expenditure line and expand revenue, that cannot be done.”
The announcement that Gigaba was now to pursue fiscal sustainability after the deficit blowout in the October statement came a week ago not from his office but from Zuma’s, an indication of Gigaba’s caution to not be seen to pre-empt or move against Zuma.
As Zuma has installed himself at the head of the budget process through the new President’s Fiscal Committee, it was important to hear it from Zuma himself that he backed the switch to austerity. There would be R25bn in expenditure cuts and R15bn in new revenue measures, he said. The statement also contained an assurance that he had backed off, to some extent, on his free higher education adventure.
It must be remembered, though, that the numbers are more than double those announced by Zuma. About R30bn has already been cut from the 2018-19 year in adjustments to the baseline expenditure in the past two years. The R15bn tax increase is also already pencilled into the framework for 2018-19.
If that is not enough, more money must still be found for higher education.
It was the enormity of the adjustment required — which itself was brought about by an unprecedented large revenue shortfall — that Gigaba says stopped him from moving forward in October.
“In the past there had been revenue shortfalls of R15bn or R20bn where it was easier to plug the shortfall. But when it shot up to R51bn, we were looking
at something very huge. We also no longer had the levers we had before of cutting costs like catering and travel; those had already been used. So that meant looking at big decisions that involve big items of government expenditure like transfers to public entities, cuts to capital projects and cuts to conditional grants to provinces and municipalities,” he said.
Although Gigaba says decisions like these were just too big to take in the time that was available in the lead-up to the medium-term budget policy statement, Treasury officials had tried countless times between April and October to present him with options and push him to a decision. But clearly back then he was not ready.
“In the Cabinet we agreed instead that [when it came to drawing up the February budget] three principles would be applied. We would take steps to build confidence in the economy, stabilise debt and present a growth stimulus package.”
He says it is important that adjustments to the fiscal framework are done in a way that does not negatively affect SA’s growth prospects. “Unless we intervene in the long-term slowdown of the economy, there will be a lasting impact on our prospects.”
While information has trickled out about the programmes that will come in for a cut – essentially the areas mentioned above by Gigaba – he is not willing to talk about the tax side of the equation yet.
As tax measures are introduced only in the February budget, as a rule Treasury does not comment before then.
However, his cautious approach is also due to some of the most controversial and difficult questions now of necessity being on the agenda.
One of these is whether to raise value-added tax (VAT). While private sector economists have been advocating it as the best way to plug the hole in the fiscus – a 0.5% hike could raise R15bn – it has been studiously avoided by the Treasury on the grounds that VAT disproportionately affects the poor, who spend a larger portion of their income on food and transport.
The trade unions have in the past bitterly contested any VAT increase. If the hike were to be made, it would have to be carefully negotiated and structured. But the government clearly lacks the appetite for a fight with the unions.
Notably absent from Gigaba’s thinking is freezing or cutting the public sector wage bill, which is probably the most important element required to rebalance public finances. How the unions react to the VAT idea will therefore be key in whether this is politically possible.
In the context of all this cutting and taxing, Gigaba says two other dimensions of managing the economy assume even greater importance: the need for measures to stimulate growth and the nonfiscal measures that could be taken to boost confidence and free up resources.
Solutions to these problems fall under the control of ministries other than the Treasury. With infrastructure budgets on the chopping block, for example, the Treasury is on the hunt for other pools of money that could be used as stimulus.
An obvious target is the unemployment insurance fund (UIF), which sits on an accumulated surplus of R130bn, with claims that are not nearly as large as the interest being earned from investments. Leveraging this fund in some way – perhaps through a contribution holiday, which would put money back into people’s pockets – has been suggested by the Treasury before and is being floated again.
But the Department of Labour has been notoriously defensive against any attempts at a raid and the unions too have opposed any tinkering with the UIF system or its surpluses.
The Department of Telecommunications and Postal Services, which has broadband spectrum at its disposal for sale, also has the ability to raise cash. Although the government policy
on broadband does not allow for an auction, there is pressure to change this.
Then there are the nonfiscal confidence-building measures. Top among these are action on the Mining Charter, which has stalled investment, and a renegotiated settlement with the industry on the legislative framework and empowerment measures and targets.
Gigaba will not comment on any of these decisions, which are under discussion by department officials. All require the negotiation of some difficult politics. But looked at in this context, it may be a little easier to understand Gigaba’s indecisiveness before the October medium-term budget policy statement.
At the time, the minister had apparently failed to engage with some of the key issues. A month later he is aware of what must be done and seems to have found the political will to do it. The big question is whether he has the influence to drive through a fiscal adjustment plan and whether he can persuade his colleagues in other departments, and in organised labour, to back it.
Previous attempts at social compacting by the government have been moderately successful but have always been backed by a far more cohesive and focused Cabinet. The government now also has a large credibility problem. To call on labour to make financial sacrifices while the government and ANC leaders live in luxury and loot state resources is not going to go down well.
In doing fiscal restructuring – such as the Growth Employment and Redistribution plan – then finance minister Trevor Manuel had the full support of the president. But Zuma can’t be counted on to lead efforts at fiscal consolidation. In some important regards, he is responsible for blocking it. As Gigaba cannot go up against Zuma — the two share a political support base — he must go around him.
This means negotiating him down from his R40bn free higher education proposal to something that is still big enough to be a victory but small enough to be contained. It means containment of projects Zuma wants to see — the nuclear build, the Umzimvubu Dam and the Moloto link — and their delay into subsequent years outside of the three-year budget process.
Gigaba has begun to put ideas on the table, even if some of them are hardly new. He knows now where he wants to go. Can he take others along with him?