/ 28 January 2016

Editorial: Sober up, ANC and cut real costs

Pravin Gordhan has a tough task ahead of him to craft a very tough budget.
Pravin Gordhan has a tough task ahead of him to craft a very tough budget.

There must be a part of Pravin Gordhan wishing he was not in charge of crafting what will probably be the toughest budget any finance minister has had to put together in the democratic era.

Just weeks from now Gordhan must tell the world how he will construct a budget amid the global fallout from commodity prices, tanking emerging market currencies and other troubles.

To keep SA Inc afloat, he will have to deliver his solution in a way that reassures skittish investors.

Capital is running to perceived safety. We report this week that outflows from South African bonds and equities in just one week this month hit R12.8-billion. A further R16-billion a month flowed out in November and December.

The reasons for the exit were not all born in South Africa. Much of the global weakness stems from the faltering Chinese economy.

But the effects will be felt here, and in visceral fashion. This year we will shop beyond our borders for food to an extent that may prove to be unprecedented. Fluctuations in the exchange rate always disproportionately affect the poor by way of such mechanisms as inflation, but in this environment the value of the rand may determine the scale.

The good news is Gordhan is off to a good start. We report that he has outlined to the ANC the stark choices faced by the government it controls; choices that must be reflected in the February budget.

The best economic news of the year to date is Gordhan was not tip-toeing around the issues. Just months before an election he went so far as to suggest the unthinkable: cuts to social spending. Social grants are a mainstay of ANC election campaigns, and for many people they are the only thing warding off hunger. Even the failure to increase social grants sufficiently, never mind any real decreases, would be ruinous in several different ways.

If Gordhan can convince the ANC that only serious intervention elsewhere – the wage bill for public servants, say – can save social spending, then we’ll be moving in the right direction.

His budget must show investors, domestic and foreign, that public debt is under control. He must show that we can affordably borrow money to continue megaprojects such as the Medupi and Kusile power stations. The only way to engender confidence is to show the backing of a sober ANC that accepts it cannot just talk of trimming the fat, tightening the belt and plugging the holes. There must be action, driven by a genuine change in mind-set.

The signs auger well for such a mind-set change. Observers believe next month’s budget will be the first since the medium-term budget was introduced in 1997 that the six-month planning cycle will be ignored. Last year’s budget has, in effect, already been discounted because the #FeesMustFall campaign meant government had to find billions in additional unbudgeted expenditure to fund the agreed zero increase in university fees.

Revolution is in the air. It must find the right target: corruption, waste and inefficiency in government spending.