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Radically reduced scope for alternatives confronts
THE FIRST MEDIUM-TERM Budget policy statement that Finance Minister Pravin Gordhan will table next week will have some unnerving déjà vu undertones for South Africa’s new administration. Escalating policy and personality tensions in the tripartite alliance, coupled with the constraints of an unfavourable global economic environment, are poised to sow the same destructive discord in the alliance as in 1996, when Government adopted the Growth Employment and Redistribution (Gear) macro-economic framework.
The ANC’s left wing alliance partners eventually used that to depose former President Thabo Mbeki and all those (read: former Finance Minister Trevor Manuel) who supported the exercise in austerity or the so-called “1996 Class Project”.
Cosatu economist Chris Malikane agrees the political and economic stage is again set in a similar way to 1996. “This Budget (MTBPS) will determine the state of the class conflict,” says Malikane, who warns Cosatu isn’t going to settle for anything less than a radical overhaul of macro-economic policy.
Idasa’s Len Verwey – editor of a new publication called Parliament, the Budget and Poverty in South Africa: a Shift in Power – says Gordhan’s task is an “extreme juggling act”. Gordhan, like Manuel in 1996, is faced with having to make choices within a dire global economic context that radically reduces the scope for policy alternatives. Sources close to Treasury point to the recent G-20 debates and argue governments like South Africa are under increasing international pressure to start abandoning crisisdriven fiscal and monetary policy (low interest rates and high indebtedness).
Ultimately, that will mean that SA’s Government spending will have to plateau from around 2010/2011. There will be no real term increases until economic growth picks up. Interest rate cuts are already on hold because the SA Reserve Bank remains unwilling to risk more, given the time lag in transmission on monetary policy.
But regardless of what Government views as constraints to its fiscal and monetary policy – and regardless of the fact Government’s tax revenue will be down by R70bn or more by year-end, the ANC’s predominantly very poor, mass voting base has high expectations of what the new Government is going to achieve with the expansionary policies promised during its April election campaign.
Cosatu is “very confident” Government won’t make the same mistakes it did in 1996 by bowing to international pressure and erring on the side of conservative austerity in the face of “such massive need and expectation”. Cosatu’s confidence is driven by new legislation that affords Parliament unprecedented scope to change Treasury’s fiscal framework and Budget. Parliament will have to approve the fiscal framework Gordhan sets out in the MTBPS. Cosatu is confident the Money Bills Amendment Procedure and Related Matters Bill is exactly the tool needed to prevent another “1996 Class Project”.
DA shadow finance minister Dion George, who is expecting a sober MTBPS view from Gordhan and an emphasis on how limited Government choices are under the circumstances, says: “The fault line in the ANC alliance is very visible now and the debate (and vote) in the finance committee over the MTBPS will be very instructive as to whether sanity is going to prevail (and how much voting support
Cosatu can muster among MPs).”
While Gordhan has already signalled Government won’t be shifting that framework in ways Cosatu expects, and while it’s still unclear how the new legislation will play itself out in relation to the Budget process, Cosatu is gearing up to have maximum influence in Parliament and has gathered a group of “progressive economists” and “other structures” to do just that. Malikane says: “There’s a realisation in the ANC the previous strategy hasn’t worked. But there’s still a need to shift some mindsets.”
Because ANC MPs will ultimately do as Cabinet tells them, Cosatu’s mindset shift includes securing more buy-in at Cabinet level. Cosatu has called on President Jacob Zuma to give official clarity about how economic policy remains the responsibility of Minister Ebrahim Patel – a Cosatu deployee. It’s called on Zuma to change the Constitution if necessary to transfer sufficient economic policy power away from treasury to Patel.
But Pan African Capital economist Iraj Abedian says, given the limited scope for major policy shifts in the current economic environment, Patel is also poised to fall way short of Cosatu’s demands over time.
However, over the very short term, Government does have a small window to buy a little alliance goodwill. While Gordhan has repeatedly indicated prudent fiscal policy paths won’t be dumped he’s likely to contain some alliance tension by tabling an overly optimistic view in his MTBPS and then promising to do all he can to maintain Government spending in his main February Budget. In the face of revenue collection having fallen off a cliff, Gordhan will honour that commitment by pushing the deficit out to around 8%.
While Cosatu is unwilling to say whether that’s far enough for them, Gordhan is expected to couple his commitment to maintaining spending with an express warning about how that isn’t sustainable (read: Budget cuts will become inevitable) unless Government improves its efficiency radically and, more importantly, unless there’s quick and sufficient economic recovery.
It’s a no-brainer: if growth doesn’t pick up and revenue doesn’t improve then of course spending will have to be cut. Perhaps, at best, not even in the sense of absolute reductions in allocations but in the sense that few, if any, new initiatives can be financed. “The political dimension is likely to come to the fore,” says Verwey.
Although Gordhan is expected to recommit (verbally) in his MTBPS to the principles and priority areas of the ANC election manifesto and, therefore, paper over the unease in the alliance, there’s no way around the fact that at some point the chickens are going to come home to roost. Everything that counts points to tensions in the alliance increasing considerably over the medium term.