A tough task in troubling times

Fiscal stability requires a lot more than just a well balanced Budget

has made manufacturers wary of investment in new capacity.

Combined with a savage drought, all of this has shrivelled growth expectations to somewhere between 1 percent and recession, with the latest estimates leaning towards the latter.

President Jacob Zuma could not have picked a worse moment to poke investors in the eye by firing a competent finance minister, but at least he is unlikely to do this again any time soon.

Gordhan has two main problems to address on Wednesday.

On the one hand, his Budget will have to reflect the changed reality of a low- or even no-growth economy, by showing that the government will cut its expenditure cloth accordingly.

That has to mean lowering – rather than just sticking to – the expenditure ceiling set by Nhlanhla Nene.

Not only is revenue certain to come in lower than anticipated for the medium term, but total government debt, projected to stabilise at just under 50 percent by 2018, will be magnified relative to gross domestic product.

In other words, even if the government doesn’t borrow a cent more than it has said it will, despite collecting less in tax revenue than it expected when it made the commitment, the debt-to-GDP ratio will deteriorate as growth slows, giving rating agencies yet another excuse to downgrade their assessment.

In any case it is not just a ques- tion for the rating agencies, because the higher the proportion of debt relative to revenue, the bigger the bite it takes out of the budget to service it.

A ratings downgrade would just increase that cost again, potentially setting off a spiral that could end up looking something like Greece.

So there will be expenditure cuts, as Zuma has indicated, although the items he mentioned – travel, catering, a single capital – are unlikely to plug the hole.

Where the cuts are made is the critical question, because slowing the infrastructure momentum by reducing spending in this area, unless it is coupled with more efficient implementation, would only store up problems for the future.

Ideally, as Gordhan has often said, consumption spending would bear the brunt, and the cost-saving measures announced – in truth, regurgitated – by Zuma fit into this category.

As with any household, a country that reduces its daily expenses and puts more money into investment is likely to enjoy a more prosperous and stable future.

Education, health and welfare count as investment because – up to a point – they increase the potential of the population to participate in the economy and create wealth, so there is unlikely to be any pruning there, except perhaps by freezing or closing vacant posts.

The much-discussed public wage bill, at 36 percent of total expendi- ture, is an obvious but politically fraught target. Waste, through poor planning and financial management, not to mention corruption, is another drum that Gordhan has been beating – as Nene did – with insignificant results.

A tax hike to help close the gap between revenue and expenditure is another likelihood, but VAT, the most efficient tax for raising a significant sum, is another political hot potato.

Zuma’s speech has primed the country for some of these measures, but it has been left to Gordhan to break the news to the patient and prescribe the medicine.

The second big problem is growth and here, as Trade and Industry Minister Rob Davies put it in the debate on the State of the Nation address, anyone peddling quick fixes is the equivalent of a snake oil salesman.

Anything better than the current dire set of predictions would go a long way towards resolving many of the above dilemmas.

The problem, even with a perfectly credible plan, is the proof of the pudding would be in the eating - at least a year from now.

Gordhan can’t rely on a wishful figure to paper over the holes in the Budget, but he has to give all the right signals in the hope that when he steps up to the podium again in October, the news will be better.

The key to this is confidence – that of the investment community and businesses – who have the capital reserves to pump-prime the economy for growth, if only they can be persuaded there will be a decent return, and confidence in the government’s commitment to get its house in order. The two kinds of confidence are linked.

Investors can hardly be expected to go through the costly exercise of developing a business plan for a new venture and then jumping through all the administrative hoops if there is a strong chance that a competitor will get the nod purely on the strength of political connections.

This is why reports that Mineral Resources Minister Mosebenzi Zwane helped smooth the way for a Gupta company to be named the preferred bidder for Glencore’s Optimum Mine are so damaging – and why steps should be takento improve transparency in the way that the government interacts with business.

The one-stop investment clearing house that Zuma said would be fasttracked could be a useful vehicle for such measures.

Similar murkiness surrounding the goings-on at the SA Revenue Service are even more disturbing.

Gordhan will be expected to explain how he intends to untangle the mess.

If he is being blocked from doing so, then faith in his abilities as a finance minister would be offset by doubts about the support he is receiving from his fellow cabinet members and Zuma.

Similar concerns, with even greater risks to the fiscus, plague the government’s handling of its state-owned enterprises.

Zuma mentioned that these had to be well-governed, but gave no details of how this would be effected.

The present system, in which boards are appointed most often without following an open selection process, has proved ripe for manipulation to secure influence for private interests.

The resultant mismanagement has cost billions in bailouts and presents a constant default risk to the parastatals’ R469.4bn in government loan guarantees.

A Shareholder Management Bill to iron out some of these kinks is to be tabled in Parliament, but it would help if Gordhan could clarify how the relationship between parastatals and the executive is to be managed.

He has called on the private sector to lend some of its expertise to the management of state- owned enterprises.

The private sector would be reluctant to do so if, as has happened too often before, competent managers could be overruled by the whims of political bosses.

Finally, the minister will have to grasp the nettle of privatisation – a topic that instantly raises hackles in the tripartite alliance.

On the one hand, giving the private sector a stake in some parastatals would kill a number of birds with one stone.

It would mobilise dormant capital to complete critical infrastructure and open the door to an injection of private expertise in project management, which the state lacks in important areas.

It would raise income for the fiscus and simultaneously reduce its debt burden, creating a far rosier picture for ratings agencies.

And it would forge co-operation between the private sector and the state which could, on its own, boost confidence.

On the other hand, unless the government has developed a clear understanding of the tension between the delivery of basic public services and the profit imperative, it could create a store of trouble for the future.

The mass privatisation of electricity generation, for example, should reduce costs in theory.

However, it could also result in a system where only those who can afford electricity get it, with more and more private customers generating their own, and rolling back years of steady progress in extending connections to the wider population.

Gordhan must juggle all of these metrics while walking the tightrope of an unpredictable political milieu, in which ANC succession dynamics will be a deciding factor in his chances of success.

He must long for the halcyon days of 2009.