Let’s hope Gordhan has no surprises

KPMG’s theme for Budget 2017 is “managing disruptions”. It is an apt theme in light of global economic and political conditions: in a period characterised by financial-market volatility, political flux and exponential leaps in innovation and technology, businesses need to be agile, flexible and founded on a clear strategy to survive (and even capitalise on) disruption.

And in the business of running the country’s economy, the National Treasury must pursue a similarly clear and consistent trajectory. This is where the steadfast approach of the Treasury has proved so reliable in recent years. “More of the same” would be a welcome premise in the upcoming Budget speech.

Stability, consistency

A seemingly “boring” Budget speech is a very welcome thing. In Finance Minister Pravin Gordhan’s address and, specifically, in the 2017/18 Budget Review document, economists and analysts will be looking for stability, consistency and incremental change towards a healthier fiscus.

A predictable approach to the Budget, building on the strong economic principles for which Gordhan and Treasury are known, will steady jittery observers, including ratings agencies and foreign investors.

The biggest challenge facing Gordhan is, arguably, economic growth, or the lack thereof. In 2016, South Africa is estimated to have seen growth of 0.4 percent in real gross domestic product (GDP). Robust economic growth is critically important to address the numerous problems our country has, including profound income inequality, poverty and unemployment.

Gordhan is expected to forecast economic growth of about 1.3 percent this year, but this view is likely to be optimistic. KPMG’s projection for economic growth in 2017 is closer to 1 percent. Although this is an improvement on the preceding year, it remains way below the above 5 percent that the National Development Plan requires.

Weakness

In a low-growth environment, there is weakness in the labour market. For those who are employed, a weak economy means wage increases closer to or below inflation as companies struggle to make ends meet.

For corporates, revenue and profits are under pressure. Profits, in turn, determine the kind of interest that investors have in companies, so this has a knock-on effect on investment, both coming into the country and within the country.

Additionally, a weak economic environment puts pressure on tax revenues – the primary funding source for infrastructure development and service provision. If South Africa could grow its economy faster, we would see a corresponding growth in tax revenues. This would give both National Treasury and taxpayers – corporate and individual – some breathing room from the higher tax rates required to match government revenue with government spending.

So where do we look for growth? The primary answer is that South Africa needs to create more jobs. Employment growth is good for the economy in general and for tax-revenue collection, and it promotes household spending, which feeds money back into the economic system. But that presents us with a conundrum: needing jobs for growth, and growth for jobs.

Where the Treasury can exert some influence, though, is on the regulatory environment that supports or hinders job growth – reducing red tape, supporting small and medium-sized enterprises and incentivising the transformation of our economy.

Another area in which Treasury has some influence is policy, specifically reducing perceived economic policy uncertainty. Although the government’s official stance is that there is no policy uncertainty, almost all other stakeholders report a strong perception of policy uncertainty across industries, including agriculture, mining and tourism.

The ugly truth is that policy uncertainty suppresses investment. That is part of the economic growth problem. If we solve the policy uncertainty problem, people can invest with more confidence about the potential returns they can expect in the medium and long term, and that itself will help to create jobs.

Moreover, investors want to see the government “putting their money where their mouth is”, so to speak. What does this mean? It is not enough to say we want and support more manufacturing growth, for example.

Good example

Tangible efforts must be made to back up these policies. Automotive manufacturing is a good example of where the government stepped in with significant support, good planning and real effort. This industry is a shining example of what South Africa could achieve through policy certainty and collaboration between the government and business.

National Treasury is under pressure – financially and ideologically – to carry the country through turbulent times and find that elusive balance between the demands of a developmental state and the accepted principles of a capitalist economy. Gordhan is not expected to offer us any big surprises or U-turns in his 2017 speech – and that should be seen a measure of a good Budget speech rather than a failing. Christie Viljoen is an economist at KPMG.