/ 24 October 2013

Mid-term budget: Fat cuts pre-empt a leaner future

Finance Minister Pravin Gordhan spelled out the problems and said that only growth can deliver a better life for all.
Finance Minister Pravin Gordhan spelled out the problems and said that only growth can deliver a better life for all. (David Harrison)

'It was the best of times, it was the worst of times."

Charles Dickens's famous opening line could easily apply to Finance Minster Pravin Gordhan's view of his medium-term budget policy statement, delivered in Parliament on Wednesday.

It was a budget update "for tough times, but also hopeful times" in light of the economic headwinds facing the country, he told the Mail & Guardian in an interview.

Overall, it appears these headwinds are prevailing. The government purse is so stretched that, after years of battling for more government savings, Gordhan finally convinced the Cabinet to agree to having their credit cards cut up. This was part of sweeping spending revisions to be applied to the national executive and broader government by December 1.

Other changes will include the standardisation of official cars, and an end to compensation for the use of personal vehicles by the executive; business class flights only on overseas trips by ministers, who will be limited to only two assistants; and a limited number of officials in delegations.

The room to manoeuvre is so limited that the cost-cutting drive is being directed even at Parliament. Not only will issues such as the size of delegations that appear before the legislature be scrutinised but also, more broadly, the cost implications of running dual administrative and legislative capitals.

The "multibillion-rand expense of running two capitals is something we need to bring under the microscope", Gordhan said, so that, in the long-term, South Africans will know what it actually costs and enable us "to make some decisions around that".

If the government's examination suggests big savings can be made by shipping the National Assembly and the National Council of Provinces upcountry, a major change to the country's political DNA may be on the cards.

The headwinds
The tough times were also evident in the numbers Gordhan tabled before his peers. Economic growth expectations have slowed and, over the medium term, total budget revenue expectations are lower than was forecast in his February budget.

The government debt is rising steeply with net loan debt (total domestic and foreign debt less cash balances) estimated to reach over 40% of gross domestic product (GDP) and peak at slightly less than 44% by 2016-2017.

Paying interest on that debt is the fastest-growing expenditure item and, in three years' time, it will hit over R140-billion, more than the country currently spends on healthcare.

The budget deficit, estimated to reach 4.2% this year, is being managed. Although it is slightly lower than expected, thanks to technical changes in how budget numbers are presented, it and expectations about the deficit of the country's current account still leave South Africa very vulnerable to negative global economic developments and disruptive, unpredictable swings in our currency.

He summed it up in his speech: "Growth is too slow, unemployment is high and many households are over-indebted. Government expenditure substantially exceeds our revenue.

"Since 2008, we have issued more than R1-trillion in debt. Our level of savings is too low to finance the investment we need. We import considerably more than we export.

"Unless we save and invest more, unless we expand and diversify our economy, unless we accelerate job creation, our aspirations will remain unfulfilled."

The hope
Gordhan said the fact South Africa now has a 20-year vision, the National Development Plan, around which to plot growth, is evidence of what the country is getting right. Criticism from the ANC's trade union alliance partners about the plan does not negate that there is broad consensus on the plan, he said.

"Let's move on [implementing] what we agree," he said, referring to energy security and skills and infrastructure development.

The best way to address the challenges of poverty, unemployment and inequality is to grow the economy, he said.

"The focus needs to be on growth, the focus needs to be on investment, the focus needs to on labour, government and business working together to create a climate for investment and growth and job creation," Gordhan said.

And, despite lower growth numbers, 2.1% was still growth, alongside real, non-interest growth in spending by the government of 2.2%.

South Africa is alive with business people and entrepreneurs, running enterprises of all sizes that are creating innovative products, Gordhan said. These are being supported by entrepreneur development initiatives although they need to be scaled up to "change the balance" of the economy, he said.

The creative talents of South Africans must be directed at a commitment to improve the lives of the bottom 40% of South Africans, to increase "their stake in life and in the economy", he said.

Some of these bottlenecks, such as developing a much-improved skills base, will take time, he said, but the country is heading in the "correct direction".

Infrastructure programmes, such as the country's renewable energy independent power producer programmes, for which 47 projects have been approved and which will add more than 3 000 megawatts of green energy to the power grid, need greater recognition from within South Africa, he said.

"When I go elsewhere the world, that is applauded as a world-class set of projects," he said.

Gordhan did not dismiss the potential impact of the global economic environment on South Africa. Among concerns are worries about European bank stability and the eventual tapering off of quantitative easing by the United States.

"Each of those introduces a dynamic which sets you back, which says you've got to think a lot more cautiously and which shifts the risk premium from advanced economies towards emerging markets more generally," he said.

Nevertheless, developed market policymakers were showing a growing appreciation of the potential spill-over effects in an interconnected global financial system, he said.

But these issues are not an "overwhelming factor" for the government's fiscal planning, although it could not "be unaware of these risks".