/ 23 October 2013

What can we expect from Gordhan’s mid-term budget review?

Pravin Gordhan has been accused of speaking to the ­treasury’s management team ‘like they are kids’.
Pravin Gordhan has been accused of speaking to the ­treasury’s management team ‘like they are kids’.

While presenting his mid-term budget review, Finance Minister Pravin Gordhan will have to perform a difficult balancing act on Wednesday as he tries to manage politically-sensitive issues such as the National Democratic Plan (NDP), while also trying to save the country money in an election year.

Six months before the polls, with investors keeping a steady eye on South Africa, government's nuclear energy programme; its multibillion-rand infrastructure roll-out; the national health insurance (NHI) scheme and youth wage subsidy will all be issues on Gordhan's radar, as well as e-tolls and the future of the South African National Roads Agency Limited, more broadly. 

But with an election around the corner, analysts say Gordhan is unlikely to announce earth-shattering changes in policy initiatives.

During Gordhan's speech, analysts will be tracking clues about government's real commitment to the implementation of the NDP. 

According to economists, Gordhan will also have to wrestle with a particularly difficult problem, which is how to cut back on government spending with voting season on the horizon, as well as reign in underperforming parastatals. 

'Losing ground against Brics'
Delia Ndlovu, director of taxation services at Deloitte, said Wednesday presents government with an opportunity to take concrete steps to foster a culture of saving in the country. 

"With the household savings rate reported to be 1.7% last year, South Africa is rapidly losing ground against Brics [Brazil, Russia, India, China and South Africa] countries in the savings race," Ndlovu said. 

Economists are also looking out for the possibility of taxes being hiked in the review on Wednesday.

Investec's chief economist Annabel Bishop said hiking taxes would damage savings. But showing commitment to the NDP's proposal – that South Africa should grow at a rate of 6% per annum – was the real solution to the country's problems. 

"The solution to faster economic growth is an increased ease of doing business, not tighter regulations, expectations of higher interest rates and above 6% increase in administered prices," said Bishop.

Cutting public sector salaries and wages
"In the absence of faster economic growth, government must cut back on spending. This is difficult in a pre-election year, but the rapid escalation in public sector salaries and wages would be a good place to start. 

"South Africa is still at risk of a rating downgrade, and as such, needs to exert greater caution in fiscal expenditure. Increased government intervention in the economy has resulted in a deterioration in government finances, many of the GIPS (Greece, Italy, Portugal and Spain) group of countries' government finances deteriorated because of the hefty financial burden of a large civil service and/or substantial spending on social services," she added. 

Bishop said indications are that the biggest drain on government's finances in the absence of any major policy shifts will be health and the NHI in particular.

"We [economists] will also be looking for more clarity on the NHI and the costs involved in implementing it, both to government and individuals [the latter being an indirect tax] … If there are no major policy changes, the main future drag on government finances will be the NHI expenditure, which will undoubtedly cost more than current estimates."

Democratic Alliance MP Tim Harris said the country's economic problems stemmed from an increase in the current account deficit and a widening fiscal deficit. This is as a result of government's inability to contain its spending, he said.

Mining and automotive sectors
Harris said Gordhan would have to restore confidence in the mining and automotive sectors on Wednesday, as crippling strike action in both those sectors undermined investor confidence. 

Government's wage bill and its "bloated" ministries would also need to be addressed. 

"South Africa's wage bill of R400-billion per year ranks among the highest amongst middle-income countries. In each of the past six years, the government wage bill has increased by more than the inflation rate, and in three of those years the increases were more than twice the rate of inflation," he said. 

Harris said Gordhan would have to establish policy certainty and show commitment to the implementation of the NDP. 

"Minister Gordhan should provide detail on exactly how NDP policies will be implemented in the face of opposition from the tripartite alliance partners. Ideological gridlock at the top of government has prevented any meaningful economic reforms and entrenched policy uncertainty and a lack of political leadership," Harris said. 

Peter Attard Montalto, executive director and emerging markets economist at Nomura, said there was a lack of leadership around the document as a whole.

'Lack of leadership'
"More broadly on the NDP, we think investors [and local business] still justifiably struggle to see what NDP-aligned policy actually means, given the lack of leadership around the document as a whole, especially in the context of a document that is not structured in costing or implementation logistics and hardly contradiction-free," said Montalto.

"More generally, it could be argued that many of the areas the treasury is saying are aligned to the NDP were treasury policy anyway. These include its social wage and inclusive growth concepts.

"Infrastructure spend is an area where the treasury has come up against serious difficulties, despite having a very strong planning capability in the form of the presidential infrastructure co-ordinating commission, as well as hard work to create the fiscal and funding room for a R430-billion government and R397-billion parastatal spending programme," he said. 

"Capacity constraints have meant the pace of roll-out has been extremely slow. Indeed, the budget in February basically saw public sector investment rates grinding to a halt in the coming two years before only a marginal pick-up. The state simply does not have the ability to continue expanding the pace of investment and, under the current largely state-centric model, [has reached] its capacity."