When economists and finance people talk about the medium term, they usually have a three- to five-year time frame in mind.
But Wednesday’s medium-term budget was, in crucial ways, about getting through the next two years in the hope of creating both the fiscal and political space for better times ahead.
That at least is the way Finance Minister Pravin Gordhan is looking at it, in an environment in which the Treasury has had to cut its growth forecasts for the next three years, with revenue now expected to undershoot his February forecasts by a cumulative R111-billion over the period, spending pressure rising, and ratings
agencies and investors watching closely to see if the government can stick to its
deficit and debt targets and avoid a
ratings downgrade that could pitch South Africa into recession.
Briefing journalists ahead of his budget speech on Wednesday, Gordhan began by urging them to leave questions about his impending court case until next week and to focus instead on the budget itself.
But he ended it with a strong message that brought together the fiscal and the political.
He talked about the constraints on the budget and the choices that had to be made, saying, “If we make the right choices, then what we are talking about is surviving the next two years”.
But he added: “Then we work like hell to build consensus, to build a common purpose, to get the noise out of the system, to create political stability and create the certainty and confidence we need for growth.”
He steered well clear of mentioning that two years would bring South Africa to the end of the Zuma administration, but he alluded clearly to leadership and the battle against corruption and capture, suggesting that over the next two years: “We will start to get a new dynamic of inclusive growth and make sure those forces in our country who want inclusive growth, so that none are left behind, are the leaders of this project.”
Lately, Gordhan has frequently emphasised that growth is South Africa’s number one challenge, but what is striking now is that the narrative about growth from him and his officials focuses on investment and on the central role of investor confidence in driving investment and hence growth, in a context in which South Africa’s investment spending has been falling in real terms. That takes it back to politics.
However, it also bears on the question of Gordhan and his team managing the budget numbers the way they did, and whether they will indeed prove to have made the right choices.
The International Monetary Fund has talked about the need for “growth-friendly fiscal consolidation” and the concern in crafting the budget was to deliver something tight enough to allay ratings agency and investor concerns about the government’s commitment to fiscal consolidation, but not so tight that it would choke off what Gordhan called the “green shoots” of growth.
The finance minister said the national narrative needed to be about inspiring growth and inviting investment.
But how the budget tries to do that is not simple, and it depends very much on that two-year time frame.
The number crunchers were conservative enough in their revised growth forecasts, at least for the next two years, revising down 2016’s estimated growth rate to 0.5% in line with, for example, the Moody’s forecast, rising to 1.7% in 2017.
They have been somewhat more cautious than usual, too, in their revenue forecasts, especially given that they have been quite shocked, apparently, by how poor this year’s tax collections have been to date.
The shortfall for the 2016-17 fiscal year is estimated at R23-billion, but the gap has been narrowed to R11-billion by a combination of underspending and savings, drawing down the R6-billion contingency reserve that had been set aside, and some nontax revenue.
That means the projected budget deficit for the current year slips by just 0.2 percentage points to 3.4%.
But the government’s commitment to fiscal consolidation is really about stabilising the fast-rising government debt level, with growth already below expectations that Gordhan had already reined in in February; it aims to cut the expenditure ceiling and pencil in sizeable additional taxes over the next two years to get the debt-to-GDP ratio to stabilise in 2017-18.
The key question, therefore, is how to close the gap over the next two years given that revenue will now fall even shorter of target.
Since the fiscal consolidation effort began in 2012, revenue has done the heavy lifting, while expenditure has continued to grow in real terms, albeit more slowly, so that South Africa hasn’t really had “austerity” budgets.
But this year comes close, with hardly any real spending growth and departments and provinces required to “moderate” – for which read “reduce” – employment as the only way to counter the steep growth in the public sector payroll following last year’s hefty wage settlement.
Gordhan could also point to success in containing costs such as consultancies and travel.
At the same time, he found the funds to add R17-billion more to post-school education budgets over the next three years, on top of the R16-billion he already added in February, making higher education the fastest-growing spending item after the public debt. And the expenditure to GDP ratio stays the same, with the government not pulling back on delivering essential services.
“We will maintain what we have,” said budget office head Michael Sachs.
But tax increases will again be needed to achieve that – especially next year, when Gordhan has pencilled in an extra R13-billion of unspecified tax increases, over and above the R15-billion he had already added in February for the following two years.
Whether that will come from fiscal drag or further personal or fuel tax hikes or new taxes such as sugar – or from the big one, value-added tax – we will hear only in February.
But if Gordhan takes an extra R43-billion out of the economy in tax increases, can he really claim to be inspiring investment?
The simple answer from the minister and his team seems essentially that the dearth of investment is a political and a confidence problem – and that the priority for the next two years is to stabilise the public finances and avoid a ratings downgrade, which would damage growth and confidence even more than tax increases would.
That’s what the tough two-year fiscal trade-off is really about.
If it works, the ratings agencies will hold off – and the government will gain the space to start growing expenditure again in three years’ time.
But the risks are high. Economic growth could be even worse.
The next public sector wage settlement in 2018 could again be steep. Tax culture and tax morality could deteriorate and revenues could be even worse than the downward revisions. The debt level might not stabilise as planned.
Above all, the long-promised structural reforms to boost growth and investor confidence may not be forthcoming in a divided, unstable political environment.
That’s why the fiscal challenge of the next two years is a political challenge – and why Gordhan is hoping he and South Africa can ride out the time in the hope that change will come.
The budget needed vision, not bean-counting, he said. The next two weeks, never mind two years, may prove him right.
Hilary Joffe is editor-at-large of Business Day
Steering SA through two more Zuma years
But Wednesday’s medium-term budget was, in crucial ways, about getting through the next two years in the hope of creating both the fiscal and political space for better times ahead.
That at least is the way Finance Minister Pravin Gordhan is looking at it, in an environment in which the Treasury has had to cut its growth forecasts for the next three years, with revenue now expected to undershoot his February forecasts by a cumulative R111-billion over the period, spending pressure rising, and ratings
agencies and investors watching closely to see if the government can stick to its
deficit and debt targets and avoid a
ratings downgrade that could pitch South Africa into recession.
Briefing journalists ahead of his budget speech on Wednesday, Gordhan began by urging them to leave questions about his impending court case until next week and to focus instead on the budget itself.
But he ended it with a strong message that brought together the fiscal and the political.
He talked about the constraints on the budget and the choices that had to be made, saying, “If we make the right choices, then what we are talking about is surviving the next two years”.
But he added: “Then we work like hell to build consensus, to build a common purpose, to get the noise out of the system, to create political stability and create the certainty and confidence we need for growth.”
He steered well clear of mentioning that two years would bring South Africa to the end of the Zuma administration, but he alluded clearly to leadership and the battle against corruption and capture, suggesting that over the next two years: “We will start to get a new dynamic of inclusive growth and make sure those forces in our country who want inclusive growth, so that none are left behind, are the leaders of this project.”
Lately, Gordhan has frequently emphasised that growth is South Africa’s number one challenge, but what is striking now is that the narrative about growth from him and his officials focuses on investment and on the central role of investor confidence in driving investment and hence growth, in a context in which South Africa’s investment spending has been falling in real terms. That takes it back to politics.
However, it also bears on the question of Gordhan and his team managing the budget numbers the way they did, and whether they will indeed prove to have made the right choices.
The International Monetary Fund has talked about the need for “growth-friendly fiscal consolidation” and the concern in crafting the budget was to deliver something tight enough to allay ratings agency and investor concerns about the government’s commitment to fiscal consolidation, but not so tight that it would choke off what Gordhan called the “green shoots” of growth.
The finance minister said the national narrative needed to be about inspiring growth and inviting investment.
But how the budget tries to do that is not simple, and it depends very much on that two-year time frame.
The number crunchers were conservative enough in their revised growth forecasts, at least for the next two years, revising down 2016’s estimated growth rate to 0.5% in line with, for example, the Moody’s forecast, rising to 1.7% in 2017.
They have been somewhat more cautious than usual, too, in their revenue forecasts, especially given that they have been quite shocked, apparently, by how poor this year’s tax collections have been to date.
The shortfall for the 2016-17 fiscal year is estimated at R23-billion, but the gap has been narrowed to R11-billion by a combination of underspending and savings, drawing down the R6-billion contingency reserve that had been set aside, and some nontax revenue.
That means the projected budget deficit for the current year slips by just 0.2 percentage points to 3.4%.
But the government’s commitment to fiscal consolidation is really about stabilising the fast-rising government debt level, with growth already below expectations that Gordhan had already reined in in February; it aims to cut the expenditure ceiling and pencil in sizeable additional taxes over the next two years to get the debt-to-GDP ratio to stabilise in 2017-18.
The key question, therefore, is how to close the gap over the next two years given that revenue will now fall even shorter of target.
Since the fiscal consolidation effort began in 2012, revenue has done the heavy lifting, while expenditure has continued to grow in real terms, albeit more slowly, so that South Africa hasn’t really had “austerity” budgets.
But this year comes close, with hardly any real spending growth and departments and provinces required to “moderate” – for which read “reduce” – employment as the only way to counter the steep growth in the public sector payroll following last year’s hefty wage settlement.
Gordhan could also point to success in containing costs such as consultancies and travel.
At the same time, he found the funds to add R17-billion more to post-school education budgets over the next three years, on top of the R16-billion he already added in February, making higher education the fastest-growing spending item after the public debt. And the expenditure to GDP ratio stays the same, with the government not pulling back on delivering essential services.
“We will maintain what we have,” said budget office head Michael Sachs.
But tax increases will again be needed to achieve that – especially next year, when Gordhan has pencilled in an extra R13-billion of unspecified tax increases, over and above the R15-billion he had already added in February for the following two years.
Whether that will come from fiscal drag or further personal or fuel tax hikes or new taxes such as sugar – or from the big one, value-added tax – we will hear only in February.
But if Gordhan takes an extra R43-billion out of the economy in tax increases, can he really claim to be inspiring investment?
The simple answer from the minister and his team seems essentially that the dearth of investment is a political and a confidence problem – and that the priority for the next two years is to stabilise the public finances and avoid a ratings downgrade, which would damage growth and confidence even more than tax increases would.
That’s what the tough two-year fiscal trade-off is really about.
If it works, the ratings agencies will hold off – and the government will gain the space to start growing expenditure again in three years’ time.
But the risks are high. Economic growth could be even worse.
The next public sector wage settlement in 2018 could again be steep. Tax culture and tax morality could deteriorate and revenues could be even worse than the downward revisions. The debt level might not stabilise as planned.
Above all, the long-promised structural reforms to boost growth and investor confidence may not be forthcoming in a divided, unstable political environment.
That’s why the fiscal challenge of the next two years is a political challenge – and why Gordhan is hoping he and South Africa can ride out the time in the hope that change will come.
The budget needed vision, not bean-counting, he said. The next two weeks, never mind two years, may prove him right.
Hilary Joffe is editor-at-large of Business Day
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