/ 25 February 2016

Budget 2016: Gordhan’s nifty political footwork may not be enough

Finance Minister Pravin Gordhan on his way to deliver the 2016 budget speech.
Finance Minister Pravin Gordhan on his way to deliver the 2016 budget speech.

One of the most politically important steps taken by Pravin Gordhan, South Africa’s finance minister, in his 2016 Budget is also one of the most economically significant: cutting expenditure on the overcompensated, inefficient and bloated public service.

The government has undertaken to reduce its expenditure ceiling by R10 billion in 2017/18 and R15 billion in 2018/19. The bulk of these savings will be achieved by reducing expenditure on the exorbitant salaries of the public service by R7.2 billion.

The number of employees in the public service will also be reduced over the next three years. As the budget review notes: “effective from 1 April 2016, appointments to non-critical vacant posts will be blocked on government’s payroll system.”

From an economic point of view, this move is critically important. But it is sure to prove extremely unpopular with the governing ANC’s powerful public sector trade union allies.

Social grants remain intact
The fact that government has avoided cuts to social assistance grants is a politically shrewd move. Gordhan noted early on in his speech that one of the things the government does well is “paying social grants.” The budget includes an overall expenditure increase on social assistance from R129 billion this year to R165 billion by 2018/19.

The old age, disability and care dependency grants will rise by R80 in April 2016 and by a further R10 in October. Child support grant payments will increase by R20 and the foster care grant by R30 in April.

With the local government elections coming up, the fact that the government is able to maintain social assistance spending amid the move to general expenditure reductions is a noteworthy political achievement.

Along the same lines, the fact that the budget speech avoided any mention of the politically dreaded “p-word” (privatisation), as well as an increase in the Value Added Tax (VAT), is sure to sit well with the ANC’s labour allies. In a pre-budget statement released by the Congress of South African Trade Unions detailing its budget expectations, the labour federation implored the minister not to increase VAT and to “forget about privatisation.”

In Gordhan’s speech, they got what they wanted.

But raising revenue through moderate tax increases possibly reflects a desire to postpone the introduction of more stringent rises until after the upcoming elections.

Long on words, short on action
Overall, Gordhan’s speech will probably prove too vague to provide ratings agencies and investors with enough confidence to stem the flow of negative sentiment around the South African economy. Ironically, despite his call that “above all what we need is action, not words”

the minister’s speech fell short of detailing how the government’s moderately ambitious expenditure cuts and revenue targets will be achieved. Avoiding talk of privatisation, greater spending cuts and tax increases (including on VAT) is sure to placate the ANC’s political allies ahead of the local government elections. But it’s doubtful whether the speech included enough concrete steps to turn around the prevailing negative sentiment about the South African economy.

Leon Schreiber, Research Specialist, Innovations for Successful Societies, Princeton University

This article was originally published on The Conversation. Read the original article.

The Conversation