Mid-term budget lacks the lever and fulcrum needed to move SA forward - Fin24, 29 October 2017

There was every indication that the mid-term budget was a speech designed to move: to move the country; to move expectations; and ultimately to move investors.

But the numbers will leave many unmoved, and reveal a country in deepening economic trouble.

The Institute of Race Relations (IRR) highlights the following as critical insights:

• There is a widening deviation between the global and domestic economic outlook;
• Tax revenue growth outstripping economic growth is unsustainable;
• Vigilance is required to ensure revenue collection efforts do not extinguish critical private services;
• Rising debt and debt service costs deflect resources from social spending at a time when those on social grants outnumber the employed;
• Over-reliance on procurement to drive growth;
• Efforts to grow skills base are skewed towards marginal university cohort; and
• Policy paralysis will continue.

Widening deviation

Whereas the International Monetary Fund projects average global growth at 3.6% in 2017, National Treasury has revised South Africa’s growth down to 0.7% from 1.3%, showing the widening deviation between South Africa’s fortunes and those of the rest of the world.

Unsustainable

Of greatest concern are the revenue and expenditure obstacles. For the most part tax collection growth is reliant on economic growth and tax policy, complemented by efficient tax administration to promote compliance.

In recent years South Africa’s tax revenue collections have outstripped economic growth on the strength of tax compliance. That was an unsustainable trend. With compliance slipping and growth at below 1%, increased revenue collections can only be realised through further tax policy changes. The now inevitable tax policy changes will be announced in the 2018 budget speech.

Vigilance is required

A desperate bid to raise revenue and push through the national health insurance could move Treasury to consider doing away with medical tax credits.

These allow approximately 17% of the population to join private medical schemes.

However millions more, who may not be on medical aid, benefit from the private healthcare system that these schemes help to finance.

With the economy in the doldrums it is not the strength of public institutions which keeps South Africa barely afloat, but rather the significant private service industry in important sectors such as health, education, security and transport.

These service industries function as a parallel private ecosystem relieving the public sector.

Pull the plug on these services and you remove an important buffer against a failed state.

Rising debt and debt service costs

Government debt is now expected to reach 61% of GDP by 2022. With a downward revision in the economic outlook, revenue shortfalls and the recapitalisation of state-owned enterprises (SOEs), the deficit will widen to 4.3%, against the 2017 budget target of 3.1%.

The potential for debt to grow faster than the economy for the foreseeable future raises serious concerns of unmanageable debt service costs, which are projected to reach 15% of GDP by 2020/21.

Increasing allocations to debt service costs deflects resources that could otherwise be used to broaden the social safety net, at a time when those reliant on social grants outnumber the employed.

A report released by the IRR earlier this year highlighted the fact that in 2016, there were just over 15.5 million people with jobs in South Africa, while 17 million people were receiving social grants.

Over-reliance on procurement

As a result of the weak economic position what the IRR was looking for were signals that significant policy reforms would be used as levers for growth. Instead Gigaba fell back to the 14-point plan outlined earlier in the year, which failed to inspire, and the intensification of the nine-point plan.

Overall, the minister places too much emphasis on the capabilities of procurement policy to drive growth. Gigaba challenged business to assist in putting “localisation firmly on the agenda”, and put forward additions to the procurement legislative landscape. In other words, set asides in the allocation of contracts for designated groups.

All of which assumes that sector-relevant skills are available and it is largely a matter of political will. Creating the demand for local black businesses with skilled workers across multiple sectors will not generate their supply.

Nevertheless, the government intends to “use the state’s spending power to grow black enterprises”.

The expectation that SOEs will fuel, on a broad basis, the growth of black businesses and the black middle class is the misconception Treasury must part with.

Preferential procurement policies remain an important conduit through which corrupt deals are facilitated for the politically connected.

Ultimately SOEs will need to be relieved of having to deliver on an overburdened development mandate.

Procurement inherently, without additional demographic prescriptions, serves an important developmental mandate. It is unduly prohibitive to use procurement policy to drive a racial transformation agenda and opens the door to improper allocation of contracts.

That R13.6 billion has been budgeted to go towards the recapitalisation of SAA will do little to ease concerns of the continual bleed SOEs inflict on the fiscus.

To truly ease spending pressures requires the rethinking of the role of SOEs in the economy and the offloading of a greater share of assets.

The government’s 14% stake in Telkom has the potential to raise a mere R14 billion, falling short of the capital requirements of struggling SOEs, in particular Eskom.

Efforts to grow skills base skewed

The government’s focus on growing the skills base is skewed towards the marginal university cohort, and that is reflected in spending priorities.

Spending on higher education is the fastest growing element of expenditure over the medium term, rising from R77 billion this year, to R97 billion in 2020/21, a large portion of which is mainly for universities to subsidise fee increases and to the National Student Financial Aid Scheme for continuing and unfunded students.

The concern from an outcomes perspective is that half of learners drop out from the primary and secondary school system in South Africa, many citing an inability to pay fees or having to work to take care of the household.

Furthermore, of those who do reach matric (Grade 12), approximately only 25% will receive a bachelor’s pass qualifying them to attend a university.

Policy paralysis will continue

Gigaba was at his most illuminating when speaking of the current political environment.

Speaking of the myriad challenges South Africa faces, he said: “The inequality they spawn can generate extremely divergent views, which make compromises difficult. The resulting stalemate and policy uncertainty can contribute to economic weakness and low confidence.”

This statement seems to be an accurate reflection of both the state of government as well as the state of the governing party behind the government: pulled between competing factions and world views. The resultant state is one of inertia in the face of mounting challenges.

In 1996, the rand having reached another low against the dollar, then finance minister Trevor Manuel uttered in frustration, “I insist on the right to govern … I insist on the right not to be stampeded into a panic decision by some amorphous entity … called the market.”

Gigaba exhibited that same hesitance to be rushed into outlining any hint of major policy rethinking despite declining market confidence. The heavy lifting is long overdue, but the levers being employed are still far too weak.

Ngwenya is the COO of the IRR – a think-tank that promotes political and economic freedom.