Close, but no consensus on key limits

It must be frustrating being Pravin Gordhan. He believes—he knows—that true national consensus on economic development would unlock much more rapid growth, higher employment and general prosperity.

“Working together we can do more” is the government’s slogan. In the budget speech Gordhan rendered it more actively still: “We have to work together to do more.”

What would that consensus look like? The budget does not really tell us in so many words, probably because the politics are deeply fraught.
Beyond allusions to working with “social partners”—a euphemism of business and labour—it does not set out a clear policy approach to sharing the burden of economic restructuring that must take place if South Africa is to break beyond the 2% to 4% growth band that has come to feel like home.

These numbers might thrill a European or American finance minister, but it is now trite that they will keep too many South Africans mired in poverty and unemployment and ultimately threaten social stability.

It is possible to discern what Gordhan and the treasury have in mind by reading the Budget Review—the more detailed document that underpins the finance minister’s speech each year—but their ability to push the full vision forward is clearly constrained.

At the level of first principles are fiscal sustainability and “intergenerational equity”, in other words, we are not going to blow the budget and if we borrow money that will not be paid back for decades, we must spend it on things from which our kids will also benefit—roads and railway lines, for example—rather than salaries for underperforming administrators in the Limpopo health department.

The 2012 budget certainly hews firmly to those limits, bringing in a lower than expected deficit of 4.6% of gross domestic product (GDP) and the containment of government debt, particularly foreign debt. That is, in many ways, an achievement on its own, given the intense pressure from within Cabinet to spend more freely and a sense in the tripartite alliance that the global financial crisis has entirely torn up the rule book.

That was not quite what Gordhan had in mind when he said that “unregulated capitalism is in crisis, we must move beyond it”.

Measures taken to placate credit rating agencies
Lower deficits and debt will placate the credit rating agencies, which is not an end in itself but a way of trying to ensure that the vast sums that must be raised for railway lines, power stations and dams are accessible at reasonable interest rates.

All this discipline cannot, in the context of South African government spending patterns, be described any longer as the cold neoliberalism of the “1996 class project”. It plays out in the context of a profoundly redistributive approach to spending.

Fifty-eight percent of the total budget goes on social services and 30% of the population receives some kind of grant support—R105-billion worth in 2012-2013. The quality of that spending is often poor, particularly in health and education, but the intent is clear at the level of policy.

And the advent of the National Health Insurance will take “social solidarity” a step further. As early as 2014 it will add R6-billion to the budget, money which Gordhan warned would probably have to be raised from new taxes. Ultimately, according to the budget review, public spending on health will increase by about 50%, from 4% of GDP to 6% in 2025.

On the other hand, spending has to come into balance if there is to be any prospect of long-term growth. Investment in the infrastructure that will get more people into work has been lagging for two decades, notwithstanding the big push that began in 2003 and culminated in the football World Cup.

Higher capital investment
Capital investment by both the private sector and the state should be about 50% higher as a proportion of GDP to really get the economy moving.

The fact that the government’s wage bill has been growing faster than any other major category of spending does not help to free up resources. That is set to change. Wage adjustments for public servants have been budgeted on the basis of a 5% cost-of-living adjustment. Are the big government employees’ unions going to work with the minister to whom they gave a political mandate to moderate their increases? If history is any guide, no.

Even the relatively modest proposal for a youth wage subsidy, which ought to be a signature policy for Gordhan’s first term, is stuck in the business-labour-government negotiating forum, Nedlac, as the budget review points out with barely concealed fury.

In terms of waste and corruption, as the treasury intervention in Limpopo shows, it is now a profound threat to both the redistributive and growth outcomes of the state, its long-term growth plans and its basic credibility.

As Asset Forfeiture Unit head Willie Hofmeyr pointed out the day before the budget, five convictions in 10 years does not suggest we are working together to fight corruption.

The Budget Review begins by sketching briefly what is needed to take advantage of massive shifts in the global economy: the rise of emerging market power, growing labour costs in China and demand for South Africa’s resources and services.

“Competing in this dynamic global environment requires flexibility, innovation and bold leadership in government and the private sector. Moving towards a more adaptable economy requires greater progress in building capable developmental public institutions and a compelling environment for business investment — macro-economic measures are not enough, they need to be complemented by trade support, competition policy and active labour market measures.”

In other words, we need structural reform to change dramatically South Africa’s potential for growth. Right now, the upper limit of what we can manage is probably just below 5% before we run into the buffers.

This budget does not—and in the current political environment probably could not - begin to make the changes needed to reset those limits.

The budget that emerges from the tension among Gordhan’s ambitions, the constraints of the global economic environment and the politics of the alliance, is a solid and respectable reflection of the treasury’s basic principles and its institutional weight, but it will not get us where we need to go, even if Transnet gets a whole lot better at building railway lines.

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