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

Financial Mail - Investors Monthly - - Budget 2017 - Marc Hasen­fuss hasen­fussm@fm.co.za

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.

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