To understand modern finance in general and the continuing debt woes in the eurozone and beyond, you need to have the word haircut in your lexicon. If you have invested in, say, Greek bonds, you do not take a 50% loss in a restructured deal, you take a haircut.
Haircuts featured foursquare in this week’s annual budget. Finance Minister Pravin Gordhan broke from his prepared speech to comment on MPs and the extent to which they had sufficient hair to allow for a haircut. Not that he was talking about the real thing, but rather about the ability of government departments to make what they have go further.
“We can be proud of the collective wisdom and will of our government in making the tough decisions that have kept our fiscus on a sustainable track,” he said. “Reprioritisation, savings, haircuts — these have been executed with singular determination.”
Haircuts, said Gordhan, were part of turning state expenditure around so that more — much more — could go to building the country’s infrastructure — roads, rail, power stations, ports and dams — to provide the basis of stronger growth and more jobs.
Projects valued at R3.2-trillion are in various phases of development or evaluation. Gordhan can eye this level of ambition because he is steering a larger economy — spending will top R1-trillion for the first time this year. The plan is to redirect spending from current expenditure on things such as salaries to capital investment.
“Fiscal policy will complement revenue growth by generating savings, moderating growth of employee compensation and improving expenditure on capital budgets,” the Budget Review stated.
“Considerable savings are being realised on goods and services spending. The 2012 budget proposes total savings amounting to R27-billion [over the medium term].”
Government underspending on infrastructure
Reprioritisation is a big task. As noted by Gordhan, government spending on infrastructure is only at 68% of what it should be. He wants to increase capital expenditure, although the government is battling to spend its current budget.
Taxpayers will welcome the drive to greater efficiency, call this a haircut or whatever you want, but with the auditor general’s latest annual report showing that R21-billion was wasted by the country’s nine provinces last year, there is room for some clean shaving here.
Gordhan wants to build more while hacking back on borrowing. The budget deficit is being slashed from a projected 5.5% of GDP last year to 4.6% this year, falling to a modest 3% in three years.
This will make the ratings agencies happy, as noted by Investec economist Annabel Bishop, who sees the likelihood of the county getting a ratings downgrade sharply reduced as a result of its improvement in financial health. Better ratings mean lower interest rates.
SOEs must fund their own projects
The message for state-owned enterprises is simple. They are expected to play a leading role in the big build but they have to fund their projects from their own cash flows and borrowing supported by their balance sheet.
Gordhan stressed the need for everyone to share in putting the country on a new growth trajectory. He wants us all to do more.
Individual taxpayers will pay more. Tax thresholds have been adjusted for inflation, meaning you pay no more in real terms in personal tax this year compared to last. But higher taxes on dividends and capital gains, a higher fuel levy and increased sin taxes will net a combined R14.5-billion.
From April 30, Gautengers will pay to use the new R20-billion freeway system at the somewhat reduced fee of 30c a kilometre, maxing out at R550 a month for frequent users. Their pain may be eased by the knowledge that all taxpayers are contributing R5.75-billion to Sanral.
Gordhan wants to do more with less while boosting jobs and fighting poverty. An example of the latter is the community works programme which gets an additional R3.5-billion, enabling the number of people it employs to rise by 90 000 to 335 000 by 2014/2015.
The plan will not please everyone but I will be signing up for his communal haircut.