Budget woes after a lean decade that changed everything for SA
| In 2007, Trevor Manuel had good news only; this year, Pravin Gordhan will raise the spectre of austerity
ABOUT a decade ago former finance minister Trevor Manuel announced that a budget surplus was expected for the next fiscal year after a disciplined narrowing of the deficit.
South Africa was riding the crest of a commodities boom, tax revenue had grown at an annual average of 17% over the previous three years.
A strong revenue trend and declining debt-servicing costs defined the state of the fiscus, providing room for the government to invest and modernise services and infrastructure.
The state’s debt interest costs had continued to fall as a share of GDP. Savings on interest after 2001 had provided an additional R33-billion a year to spend on services and infrastructure.
Fast forward a decade later and almost exactly to the day Manuel’s latter-day counterpart, Pravin Gordhan, is expected to deliver a sobering judgment on just how different a place the world has become.
There is no budget surplus, rather a focus on reducing a deficit, which speaks of a country spending more than it produces. China’s insatiable demand for everything coming out of Africa had reached its limits.
It’s a position that bears resemblance to the European sovereign-debt crisis, which reached its peak in 2011 and threatened the future of the euro as a currency.
While SA’s debt levels aren’t comparable with those of troubled European states such as Greece, austerity is the word that will be used to describe this week’s budget.
“I think that spending will have to remain constrained, but we aren’t likely to see the sort of state-shrinking cuts that became common in much of the EU,” John Ashbourne, Africa economist at London-based Capital Economics said.
But for Ashbourne, the country’s situation wasn’t anything like what happened to Greece or even Italy because a lower debt to GDP ratio added to the fact that there had been no systemic effort to hide figures.
Due to low tax growth and overspending, economists expect tax hikes and expenditure cuts from the Treasury, which will be a departure from the historical trend.
The Treasury proposed raising an additional R43-billion through tax measures over the next two years.
But the unemployment rate remains high at 26.5% and the personal income taxpayer base is small at 6.7 million people.
Johannesburg economist Yumna Ebrahim said Gordhan was practising austerity.
“I think we’re going to see a lot more mention of ‘cutting back’, once again this year. If Pravin remains in his position over the long term, I believe we will be safe from reaching such a dire situation as that experienced in Greece, as Pravin is likely to continue to practice austerity,” Ebrahim said.
Gordhan’s second tenure as finance minister has been a whole lot less assured. He came in after President Jacob Zuma surprised markets by firing his predecessor, Nhlanhla Nene, and replacing him with relative unknown Des van Rooyen for four days in December 2015.
Parachuted in to save the Treasury’s credibility, Gordhan’s seat has been anything but safe.
Wits University economist Lumkile Mondi argued that South Africa’s debt to GDP ratio meant “for millions of people that are not in the labour market we will never be able to deliver on social infrastructure or sustain social protection . . . That money has to come from borrowing because our economy is not growing.”
The surplus budget of 2007 came with debt to GDP ratios of 27%, which according to Bloomberg data has since shifted to above 50% — similar to 1995.
So did South Africa squander its surplus? Economists say that after the downturn that followed a year after Manuel’s speech, the state had no choice but to spend to stimulate demand.
“At the moment, a huge chunk on Wednesday of our budget will be going towards servicing debt and paying government salaries. There’ll be very little going towards capital investment, which is so much required for us to have an economy that is growing and to address failing infrastructure,” Mondi said.
“The Zuma government went big in seeing the state as an engine for economic development. However, the economic return is yet to be seen because so much money has been spent, yet we are not seeing huge differences,” Mondi argues.
The state soaked up many jobless individuals. Public service employee numbers swelled 20% from 2006 to 2011. The public sector wage bill consumes about 40% of the budget.
Mondi cited other examples of massive state investment with little immediate return, such as the government guarantees of more than R300-billion extended to Eskom to allow it to raise funds in the market for its build programme, yet “a lot of the technology coming into Eskom has been imported”.
South Africa has paid far too much for the Medupi and Kusile power stations in comparison with similar builds in India, which “indicated the lack of credibility in terms of skills in South Africa around project development and project management”.
“This is a huge concern, if you cannot manage a thermal power station, what domestic industrial benefits can come from a nuclear programme, which costs five times [that] of a thermal project?
“So we remain concerned as South Africans around how much skill deepening do we create with these programmes, because in the past that money would have been used to deploy capital but you also strengthen domestic capability,” he said.
Government debt has breached the 50% mark and is projected to stabilise at just under 48% of GDP.
In October, the Treasury said the government’s debt exceeded R2-trillion “and rising debt-service costs were crowding out expenditure on infrastructure and education”.
Four years ago, the International Monetary Fund warned in a position paper on South Africa that “fiscal space built up in the mid-2000s had been eroded” as a result of countercyclical fiscal policies in response to the global financial crisis of 2008.
Were there room today, it would be beneficial, with economic growth expected at 1.3% this year, which is only slightly higher than the grim 0.5% expected for 2016.
This would have been the slowest rate of expansion since the economic downturn in 2009, due to low commodity prices and drought. The official figure is to be published by Statistics South Africa next month.
Commodity prices are recovering and this may lift the country’s revenue, but Ashbourne said: “Rising commodity prices will not provide the boost to South African growth [that] you might expect.”
Commodity prices “do not all move in line”. A key driver of higher commodity prices in 2017 will be an increase in the oil price. But, “as a net oil importer, this is actually a headwind for [the] economy, not a boost”.
South Africa was also a mineral exporter, but the cost of many of its mineral exports was likely to remain stable or fall.
“We think that moves in commodity prices will hurt South Africa in 2017 as higher oil prices hit consumption.”
Oil prices gained 73% over the past 12 months, resulting in rising petrol prices that feed into inflation, but this was partly offset by a rand that had strengthened more than 15%.
Johan Els, Old Mutual Investment Group senior economist, said the budget would be critical, given that there is no room left for the upward revision of deficit targets as seen over the past few years.
He said international credit ratings agencies would monitor the 3.1% budget deficit target set in October and the mix of tax rises introduced in the budget.
“If they decided to increase value-added tax, this would be viewed as a significant step in the right direction.”
While most economists were sceptical about the prospects of an actual VAT hike, Els felt there was rising talk of a 0.5% VAT hike, which could contribute R10-billion to the budget.
A tighter budget was key to South Africa’s policy mix as it could provide the South African Reserve Bank with the room it needed to cut interest rates as it was expected to do in the second half of the year.
This may ease constrained consumer spending and stimulate further growth.
The Reserve Bank’s monetary policy committee, which had hiked interest rates by a cumulative 200 basis points between January 2014 and early 2016, has restrained itself from increasing rates last year in the face of weak economic growth.
This week, Gardner Rusike, sovereign credit analyst for emerging markets at S&P Global Ratings, told Bloomberg South Africa had more to focus on than curbing spending if it wanted to prevent a downgrade to junk. Political tensions had to be eased and plans implemented to boost economic growth.
So much money has been spent yet we are not seeing huge differences