Good leadership the only solution

All eyes are on the budget policy statement

THE details of the coming medium-term budget policy statement are keenly anticipated, given the current domestic social and economic challenges. In the present financial and economic context, it is crucial that this year’s budget policy statement finds the delicate balance between social and economic pressures.

Perhaps the greatest concern is the balance on the current account, which reflects export inflows and import outflows on the trade and services accounts. In the second quarter, exports fell short of imports by R200bn. Data released by the Reserve Bank on Friday showed the deficit on the trade account increased from R6.7bn in July to R12.2bn in August. In addition, wildcat strikes have spread from the mining industry to the motor industry, further endangering a vital source of current account inflows, as well as thousands of jobs.

Partly as a result of the poor global economic environment and partly because of our own turmoil, capital inflows slowed in the second quarter. Not surprisingly, these conditions have also affected foreign direct investment. Such flows into the country amounted to R5.7bn in the second quarter compared with R7.7bn in the first quarter.

Trade and political concerns, among others, have also had a detrimental effect on the rand. Last week, the rand weakened as much as 1% against the dollar on the back of poor manufacturing data from China, as well as concern about Spain’s debt and the spread of SA’s wildcat strikes. Over the past year, the rand has been one of the worst performing emerging-market currencies, weakening by 4.14%.

The weak rand has already led to significant increases in food and fuel prices and it is likely to come under increased pressure if the trade account continues to record large deficits. If the trend continues, inflationary pressures are likely to fuel social unrest and generate sympathy for workers’ demands.

SA’s budget deficit has also widened over the past year and — as international rating agencies warned — the inability of the government to withstand current socioeconomic stresses could have significant budgetary consequences. Sadly, the appropriate allocation of state monies will ultimately not determine whether the budget achieves its aims. Most of our financial woes are a symptom of two deeper problems — a dearth of leadership and a lack of policy focus.

Last year, Finance Minister Pravin Gordhan pointed out that sound fiscal and financial institutions are not enough to protect against job losses arising from turbulence originating elsewhere in the world and this remains the case. This year it is likely he will once again advance a message of eco- nomic self-reliance. Given the weak global economy and slowing growth in China, it is likely commodity prices will fall further and we cannot expect our economy to be propped up by international demand as before. Overcoming the challenges facing the economy will need a national effort from all role players over the long haul.

To placate the rating agencies and ensure the budget deficit remains sustainable, the National Treasury will need to keep unnecessary spending down, since the recent downgrade means borrowing will be more expensive. That is not to say the Treasury should be going the austerity route, but rather that spending needs to be productive — education and job-creation projects come to mind. Extensive spending on infrastructure is necessary but must be efficient. At the same time, to encourage investment, the government must be careful not to crowd out much-needed private investment with overzealous public spending. There is no question that the government is in a tight spot. The quick-fix solution — spending more merely to stimulate growth — will do more damage in the long run. To stabilise the rand and attract foreign capital, the government also needs to reassure investors that illegal strikes will be dealt with firmly and within the rule of law and that mining interests will be protected. Until real policy changes are brought about, the words of assurance offered by the likes of Trade and Industry Minister Rob Davies are likely to fall on deaf ears.

It is crucial that the quality of education be addressed rather than throwing more good money after bad. The poor performance of some provincial education departments and the lack of consequences is a direct consequence of poor leadership. Even more important, unemployment must be addressed in a more structured way. The only way the government will damp social unrest is to make it easier for businesses to create jobs. As has been said time and again by the government and the private sector, this cannot be achieved by the government alone.

Now more than ever, the budget policy statement must reposition the economy in such a way that investment is promoted, jobs are created and inequality is reduced. Weak leadership is the cause of most of SA’s economic problems, and proper leadership is the only solution.