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A budget of prods and tweaks in the right direction

25 February 2016   (0 Comments)
Posted by: Author: Financial Mail
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Author: Financial Mail

Finance minister Pravin Gordhan adopted a tenor at the start of his budget speech which, at last, matches SA’s parlous economic position. Gone is the attitude of faux bullishness, underpinned by some measured caution, that were the hallmarks of previous budget speeches, many presented by himself, and his predecessor Nhlanhla Nene.

In its place was a more humble, more real, and more appealing presentation. It was, in many ways, the state of the nation speech that President Jacob Zuma should have given earlier this month. "We are conscious of the difficulties we face. Our resilience as a nation, black and white, can propel us to a better future if we make the right choices,” he said.

Gordhan was in the position of someone trying to instill confidence but at the same time face the truth, and this resolved itself into the idea of "resilience”, which was the hallmark of the speech this week.

Yet notional resilience doesn’t help balance the books, and this is where Gordhan’s biggest problems actually lie. He repeatedly mentioned "belt-tightening” but it turns out the idea is more complicated than it might first appear.

This is all very evident if you compare what Nene was expecting for the current financial year and what Gordhan is expecting for the same period. In the budget presented last year by Nene, the then finance minister estimated the overall budget deficit would be -3.9% for 2015/2016, reflecting government expenditure substantially higher than income. This deficit level is not in the red zone, but it is close. However, he projected a steep drop in the deficit number to -2.5% for the 2016/2017 financial year, which somewhat relieved commentators at the time.

That 2016/2017 financial year is now with us, and Gordhan’s budget this week suggests that, in fact, the deficit will actually come in at -3.2%.

Hence, the deficit is lower in absolute terms — undoubtedly a good thing. That level takes SA into a space that is more or less fairly sustainable, assuming all else is equal. But at the same time, it is not as large a decrease as Nene was hoping it would be for this financial year when he delivered his budget a year ago.

If you look at the income and expenditure numbers, it is easy to see why Gordhan was forced into this position. The problem, in short, is that the economic growth that government was hoping for just didn’t materialise.

Nene was expecting total GDP to be R4.54trillion for the 2016/2017 financial year. Gordhan has been forced to pare this back to R4.36trillion. The poorer economy has also forced Gordhan to pare back expectations of government income. Nene’s budget expected total consolidated revenue after his tax proposals to come it R1.33trillion. Gordhan has kept this steady at R1.32trillion. In the context of roughly 6% inflation, this is effectively a decline.

On the expenditure side, we see much the same pattern. Nene’s anticipated expenditure for the current financial year was R1.45trillion. Gordhan has allowed this to increase, but only slightly to R1.46trillion.

In case anyone might think these seemingly small proportions might not mean much, the effect is horribly visible in the amount government will have to borrow. Nene was anticipating that government would have to borrow R117bn for this period. Gordhan’s budget anticipates that government will have to borrow R139bn.

That crunching addition to SA’s burden on its children partly explains why the rand slowly sank during Gordhan’s speech, even though he was seemingly saying all the right things. On a more positive note, it is in the future years that Gordhan’s hand can be seen more clearly. For 2017/2018, he has pulled the deficit down further to -2.8%, and then -2.4% for the following year. Yet it is worth noticing that Nene was anticipating a -2.5% deficit in 2017/2018 already.

Beyond leaning on these numbers, Gordhan announced no dramatic moves in respect of the overall structure of SA’s finances.

The tax increases were slapped on mostly to marginal items and, of course, the lower oil price makes it easier to increase excise taxes without hurting the motorist too much. But the general structure is retained; the maximum marginal rate is kept steady, ordinary business taxes remain and Vat is kept at the same level.

This was all in considerable contrast to the expectations of the budget, which were, inadvertently perhaps, slightly overhyped. That tone of just leaning on things rather than totally breaking the mould was evident elsewhere too. On the topic of state-owned entities for example, Gordhan actually did partly forward a powerful defence of state ownership. The asset base of state-owned entities is over R1trillion, equivalent to about 27%, he pointed out. Later in the speech, he said: "Our aim is to strengthen our state entities so that they can play a propulsive and dynamic role in our development.”

However, the tone has now definitely changed. As opposed to a defensive position on the issue of co-ownership with the private sector, now the idea is positively embraced.

Much the same approach is applied to the state personnel bill, which was actually announced prior to the budget by Zuma. The increases were modestly under inflation overall, but nothing you might describe as "mould breaking”.

This gradualist approach to change had the effect of disappointing some commentators, who were clearly expecting more. But this slightly underestimates the complexity of the budgeting process. Battleships take a while to turn, and Gordhan took hold of the tiller only a few months ago.

Even though this budget constitutes a gentle leaning on the tiller, that in itself constitutes a substantial bet. Gordhan is effectively betting SA can tweak its way out of this mess.

He ended his budget speech by quoting former president Nelson Mandela who said: "I am fundamentally an optimist. Part of being optimistic is keeping one’s head pointed towards the sun, one’s feet moving forward.” It’s a beautiful quote, but in some ways it reveals Gordhan’s bet; he is hoping that by keeping the ship steady, the tide will turn under the economy and start lifting all the boats, including his. Let’s hope he is right.

This article first appeared on financialmail.co.za.


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