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SA faces troubled financial waters

Monday, 08 February 2016   (0 Comments)
Posted by: Author: Craig Dodds
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Author: Craig Dodds (IOL)

In February last year the ill-fated then-finance minister, Nhlanhla Nene, forecast GDP growth for that financial year of 2 percent, but by October the figure had fallen half a percentage point to 1.5 percent.

The result was a decline in gross tax revenue of R7.6 billion and a drop of R35bn in estimated tax earnings over three years.

Fast forward to today and the IMF now expects GDP growth for South Africa of a measly 0.7 percent in 2016/17, a full percentage point less than Nene’s 1.7 percent prediction in October, or double the downward revision he had to make between February and October last year.

There is a slightly elastic relationship between GDP and tax growth, so projecting what the impact on tax revenue of a 1 percentage point drop in estimated GDP will be is an imprecise science, but it would go something like this: a 0.5 percentage point fall in GDP expectations resulted in a 0.7 percentage point drop in tax receipts, so a 1 percentage point drop in GDP could result in as much as a 1.4 percentage point drop in tax revenue in the coming year.

As Nene’s Medium Term Budget Policy Statement anticipated gross tax revenue of R1 164.6bn, a 1.4 percentage point drop in earnings would leave a R16.3bn hole in the revenue estimate for the coming year.

That, give or take a billion or so either way, is new/previous Finance Minister Pravin Gordhan’s first headache as he puts the finishing touches to the Budget he will deliver in a few weeks’ time.

But it doesn’t end there.

President Jacob Zuma announced at the ANC’s anniversary celebrations in January that the government would find an additional R4.6bn to fund higher education in response to the #FeesMustFall campaign.

This, the government has said, would be done by reprioritising funds from other programmes.

Together this adds up to roughly R21bn Nene thought in October he would have this year, but which Gordhan doesn’t have right now.

There is also the need for drought relief, with the contingency reserve depleted by the public sector wage hike negotiated last year, and the Reserve Bank now forecasts average inflation of 6.8 percent this year, which, because the wage agreement is linked to inflation, means the wage bill will take an even bigger bite out of the Budget than predicted.

Borrowing more, while the possibility of a credit rating downgrade looms large, is not an option, so it’s clear the pain cannot be deferred.

It will be felt in tax hikes or spending cuts, or both. Probably both.

There have been some clues. The statement of the ANC national executive committee lekgotla, at which the governing party gives the government its marching orders for the year, mentioned a need for "stringent cost-cutting measures” and the consolidation of sound fiscal practices to strengthen confidence in the economy.

This week the presidency said at the start of the cabinet lekgotla, where the details of this week’s State of the Nation address will be discussed, the meeting would, "given the dire economic situation”, focus strongly on the economy, "especially the national response to the slow economic growth and a highly constrained fiscal environment”.

Another clue came in the form of a statement from Cosatu, which attended the ANC lekgotla as an alliance partner, following a special central executive committee meeting this week.

Speaking of a "classical neoliberal offensive” against workers coming from the government, Cosatu said this was evident in "the government’s emerging call for cuts in social spending and the unilateral moderation or even threats to cancel workers’ wage increases to please foreign rating agencies”.

But the strongest hint came from Western Cape Premier Helen Zille’s "Inside Government” newsletter.

She said she’d been summoned to a meeting with Zuma and Gordhan last week where premiers were told that "urgent and far-reaching budget cuts are needed”, which, for the Western Cape, would run into hundreds of millions of rand.

"As a minimum, we will need to freeze appointments in vacant posts, and significantly scale down the number of new posts, including teachers, to serve our rapidly growing population,” Zille wrote.

Treasury suggestions on how to implement the cuts had included rationalisation of the workforce, which Zille described as code for retrenchments.

Given that compensation of employees constitutes 36 percent of total estimated expenditure for the coming year, it’s clear even a modest "rationalisation” of the workforce or moderation of wage hikes would yield far bigger savings than cutting back on social protection, for example, which comprises just 11.55 percent.

So reports that Gordhan has proposed cuts in social spending probably relate not to social grants or free basic services - which might actually have to be increased to account for inflation, but to personnel, including in sectors like health and education.

Zuma is not obliged to, and usually doesn’t, deal with specifics in his State of the Nation address that are likely to be covered in the Budget, but this year the expectations are different because his inexplicable sacking of Nene gave the impression he was prepared to sacrifice his finance minister to further ends unrelated to the good of the economy.

To allay such fears he would have to give his personal backing to any unpopular choices Gordhan has had to make - including tax hikes and spending cuts - by at least explaining the need for them in the course of his speech.

That’s an ugly prospect for a president probably at the lowest point of his term in office when it comes to public confidence in him, but if he doesn’t bite the bullet, and instead leaves Gordhan to take the heat, it will decline even further.

This article first appeared on



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