Balancing political principle with economic reality

SA should be obsessed with finding a cure for inequality, according to Pravin Gordhan. But in its quest for a more inclusive economic model, recklessly ignoring the ‘stark’ situation faced by the country can only end in tears

The persistent refrain in finance minister Pravin Gordhan’s budget speech was inclusive growth, harking back to President Jacob Zuma’s call for radical transformation of the economy during his state of the nation address.

But while Zuma’s message could be dismissed as placatory populism, Gordhan’s musings are harder to discount. At the prebudget briefing with journalists, he suggested economic inclusivity should become a national obsession.

Of course, the reality is that radical transformation is overshadowed by stark fiscal fundamentals. It might not be politically convenient at a time of growing populist sentiment, but the hell-bent pursuit of radical economic transformation against a backdrop of lacklustre economic growth could easily damage SA’s already fragile longer-term growth prospects.

In his prebudget remarks, Gordhan insisted there is enough money in the system “to do what we want to achieve”. But he added that “many processes are at play at the moment” and an “economic Codesa” might be required to find solutions to inequality.

The budget is already highly distributive to poor and working families: about two-thirds is earmarked to realise social rights. But meaningful transformation still needs to take place to change perceptions of the imbalance in control and ownership of the economy. Transforming the economy, even at this delicate juncture, is not open to question. But how radical is the economic transformation envisaged by Zuma?

In the preamble to the budget speech, Gordhan stressed that transformation will not be achieved through “conquest, conflict or extortion”. Rather, it will be built through economic participation, partnerships and mobilisation.

Gordhan noted: “We have a plan for a more inclusive, shared economy. Its implementation requires greater urgency and effective collaboration among all social stakeholders.”

From the outset, Gordhan reiterated that sound public finances, the health of financial institutions, investment-grade credit ratings and competitive public procurement processes are valued elements in the sustainability and integrity of the country’s transformation path.

But the progress in radical economic transformation must be rapid: “There is a growing impatience and ferment among our people.”

His priorities in creating this transformation revolve around a handful of initiatives in which government wants to work with the private sector and social stakeholders.

Improved education is a priority — particularly the quality of basic literacy and numeracy in the first phase of schooling. Reform of technical and vocational education, and of training programmes, are also highlighted as ways to meet occupational and industrial needs.

Gordhan also believes in accelerating development in cities through housing development, better public transport, urban enterprise and industrial development. He contended that SA’s integration and linkages with regional neighbours offer significant opportunities for enterprise growth, agricultural development and the creation of new industrialists.

The most critical consideration was left for last: “Reform of domestic market structures, promotion of competition, ‘deconcentration’ of monopolised industries and greater private [involvement] in sectors dominated by public

enterprises: these are structural reforms that will bring opportunities for business development, modernisation and a more balanced distribution of wealth and opportunities.”

He pointed out that state-owned companies hold a combined asset base of R1.2 trillion, and are well placed to partner with private-sector investors to grow the productive capacity and infrastructure of the economy. Some observers may wonder if his remarks had any bearing on SA Airways. He met airline board members last week to discuss turnaround plans. “I am pleased to report that the challenges are well understood and the advisory work that is in progress has clarified the way forward,” he said. Overall, though, the base to support radical economic transformation is brittle, and the 3.1% budget deficit for 2017/2018 looms large. Gordhan’s challenge is to grow a sluggish economy so that it will open up more business to previously excluded participants rather than reinforce existing ownership structures. He said: “Acting too quickly to reduce the deficit would harm service delivery, delay economic recovery and compromise tax revenue collection. But to ignore fiscal targets would result in interest-rate hikes, unsustainable commitments and creditrating downgrades. This is a scenario in which short-term gains would quickly give way to financial stress, capital flight and cutbacks in service delivery.” Treasury needs to raise R28bn in additional tax revenues and cut spending by R26bn over the next two years. In summary, the proposed expenditure of 2017/2018 will top R1.56 trillion and projected revenue should reach R1.41 trillion. This means the shortfall of R149bn (3.1% of GDP) will be borrowed at a time when interest on government debt of R2.2 trillion (50.7% of GDP) amounts to R169bn. Predictions are for total tax revenue of R1.14 trillion in 2016/2017 — an increase of about 7%. The main tax proposals, much to the relief of consumers, do not include proposals to hike Vat. But there is some pain for big earners, with a new top personal income tax rate of 45% for those earning taxable annual income of more than R1.5m/year. Gordhan estimated this will raise R16.5bn.

Possibly even less palatable is the decision to push the dividend withholding tax rate from 15% to 20%. This will raise R6.8bn, assuming companies don’t opt for scrip dividends or share buybacks as an alternative to cash payouts to shareholders.

There is limited bracket-creep relief, pushing the tax-free threshold from R75,000 to R75,750.

Then there are the traditional hikes in sin taxes and the fuel levy. The excise duties for alcohol and tobacco increase 6%-10%, while the general fuel levy increases by 30c/ l and the road accident fund levy by 9c/ l. This should add another R5.1bn to government coffers.

The sugar tax on sweet beverages will come in later this year once legislation is passed. The proposed carbon tax still looks some way off.

The expected tax revenue breakdown for 2017/2018 shows R482bn from personal tax, R313bn from Vat, R219bn in corporate income tax, R96bn from customs and excise duties, R71bn in fuel levies and R85bn from other sources. Treasury has pencilled in a narrower deficit of 2.6% in the 2019/2020 fiscal year. The big amounts over the next three years are R490bn on social grants, R106bn on transfers to universities (R54bn to the National Student Financial Aid Scheme), R751bn on basic education, R115bn on subsidised housing, R94bn on water resources and bulk infrastructure, R189bn on basic services for poor households, R143bn to support public transport and R606bn on health.

In terms of spending efficiencies, Gordhan promised further procurement reform. He said a draft public procurement bill will be published shortly, establishing a single procurement authority and consolidating a fragmented regulatory environment.

It seems tangible progress has been made with the central supplier database, which is now fully operational.

Gordhan said: “It enables government to know who it is doing business with and to use technology to reduce the opportunities for fraud and corruption.” Large numbers of transactions have been identified for further investigation.

New procurement rules have resulted in savings of R675m on cellphone and vehicle contracts. Gordhan estimated medium-term savings of between R1bn and R1.5bn on vehicle contracts alone.

In the property leasing sector, savings of R2bn-R3bn are expected, and R2.5bn will be saved in the next three years in the 10 largest ICT equipment contracts.

Collaboration with the department of basic education on cost-effective standards for building design has reduced the average cost of building a new 7,500 m² school from R70m to R34m.