Elephants in the budget room
There is a meme that is often posted on social media when someone has had a particularly bad day.
In the first frame a cartoon dog sits serenely at a table but around him flames lick the walls and thick black smoke hovers overhead. In the next frame, the gleeful dog’s speech bubble asserts: “THIS IS FINE.” Finance Minister Pravin Gordhan surely can relate.
In increasingly uncertain times, the ever-composed finance minister confidently delivered his budget speech on Wednesday, outlining a fiscal plan that didn’t ruffle too many feathers. He plugged the revenue gap by introducing new taxes for South Africa’s rich and continued to prioritise funds for social spending. He cut expenditure budgets further to shift money into prominent areas of demand.
But there was practically a herd of elephants in the room. Although not necessarily budget items, government agencies, state-owned enterprises, higher education and public wages among others pose substantial risks to Gordhan’s carefully balanced budget and will require attention — and, potentially, funding — long before next February rolls around.
In a general comment to media about any new demands on the budget, Gordhan said: “The cash must come from the fiscal framework; it must come from somewhere else in the system … This is a zero- sum game.”
Propping up parastatals
One of the clear risks is state-owned companies that are poorly managed and seek cash injections. In his speech, Gordhan touched on this when he said: “The reform of state-owned companies is an especially important part of the restructuring and strengthening of the economy.”
He added that measures to reinforce governance and accountability imposed immense responsibilities on boards and senior managers.
Gordhan told the media there was room for improvement — “if you want to be very diplomatic about it” — in boards and management teams.
SAA in particular has received a great deal of attention from the treasury in an attempt to turn the entity around. In a recent meeting the new board, appointed by Gordhan, appeared to have a good grip on the issues, he said. But the board chairperson, Dudu Myeni, “was unable to avail herself at the meeting”, the minister said. Myeni has presided over a crisis at the airline but is believed to be untouchable because of her close relationship with President Jacob Zuma.
“We are optimistic that once there is a new CEO and CFO, there is a good chance of SAA being turned around.”
Treasury officials said the airline will require a significant equity injection but could not yet say where this money would come from. They did, however, offer assurances that it would be funded in a deficit-neutral manner.
More pressing is the issue of the South African Social Security Agency (Sassa), which falls under the department of social development and is facing a mammoth problem with the administration of about 17‑million social grants.
The department appears likely to extend its contract with Cash Paymaster Services (CPS) — the current technology provider that administers grants — which expires at the end of March. Not only does this go against a Constitutional Court judgment that found the original contract with CPS unlawful, but it’s reported that the company is demanding an extra R1.3‑billion a year to continue providing its services.
“On Sassa there is little to say,” said Deputy Finance Minister Mcebisi Jonas. “Ultimately, the responsibility is with the department of social development.”
He said the treasury would look at the fiscal implications once the process had been concluded but added that the department was meant to have taken the matter to the Constitutional Court. It has not yet done so.
The budget review document, however, anticipates funding demands from the social development department. It outlines some provisional allocations to be considered for the 2018 budget. These are included in the medium-term expenditure framework but have not been added to departmental baselines. Instead, departments will have to make representations for these funds. The provisional allocations include R1.6‑billion for social development.
After completing his budget speech Gordhan received a standing ovation from all MPs but four, including Social Development Minister Bathabile Dlamini.
Gordhan and the treasury made no mention of the crisis facing the department of water affairs, which would probably also have a budgetary implication.
City Press recently reported that the department needed to be put under administration because it is bankrupt and R4.3‑billion in the red.
The budget speech also failed to highlight major concerns about the South African Revenue Service (Sars). Gordhan said tax revenue lagged behind the economy — the shortfall is R30‑billion.
Gordhan told the media that he had had meetings with Sars and was concerned about “the shape of revenue collections”.
A tenuous relationship exists between Gordhan and Sars commissioner Tom Moyane, who was once again notably missing from the budget press briefing.
Gordhan stressed the importance of a well-run revenue collection agency. “In the interest of future generations, there are institutions you don’t mess with”, one being the treasury and the other being the revenue service.
#FeesMustFall … eventually
The finance minister attempted to offer something to appease the growing call for free higher education until the Heher commission of inquiry, which is looking into the feasibility of free higher education, completes its work by June.
Adding to increases of R32‑billion announced last year, the treasury allocated a further R5‑billion to higher education in the medium term. “Government has provided funds to ensure that no student whose combined family income is below R600 000 per annum will face fee increases at universities and [technical] colleges in 2017,” Gordhan said.
All students who qualify for National Student Financial Aid Scheme awards will also be supported with government funding.
But this is unlikely to satisfy South Africa’s young people for long, if at all. The Democratic Alliance swiftly criticised the announced increase as being too short-term and nowhere near enough to sustain institutions of higher learning in the longer term.
But the budget speech did emphasise that a clear road map towards a better higher education and training system was needed, given the magnitude of the funding requirements.
Gordhan said the government was determined to address the issues in post-school education, although resources would determine the pace at which they could be addressed. He implored employers and industry to up their contribution by funding bursaries, internship opportunities and research programmes.
The budget is also vulnerable to an increase in public sector wages, which accounts for some 40% of government spending, although the costs would only affect next year’s budget. But the treasury is playing hardball, determined that the public service does not place unacceptable demands on the budget.
A hard-fought battle in 2015 resulted in the treasury agreeing to an above-inflation wage agreement that will expire in March next year. Now the treasury is seeking to cut the wage bill.
“To reduce spending, some of it has to come from the wage bill,” said director general Lungisa Fuzile. “We will use natural attrition, but there will be instances where you will need something more.” The existing framework allows for voluntary severance packages; other measures may be used to augment the process.
Gordhan, Gordhan, gone
Asked whether he was at risk of being fired, a deadpan Gordhan retorted: “Do you know something I don’t know?”
There is widespread concern that Zuma is gearing up to remove the finance minister. Gordhan was brought in to fill the post in December 2015 to calm a market that had a justifiably adverse reaction to a Cabinet reshuffle in which Nhlanhla Nene was removed from the helm at treasury and replaced with parliamentary backbencher Des van Rooyen.
Asked whether it mattered who headed the treasury, Gordhan said: “I suppose it does matter for the kind of ideas and policy that is generated: what is taken to Cabinet, and what you advise the head of state,” he said.
Fuzile said he had worked under four ministers in his six years at the treasury. “A high turnover of ministers damages morale,” he said, adding that competent people tend to leave organisations when there is upheaval.
Society needs to become aware of the importance of good institutions and their direct effect on economic growth and development, Gordhan said.
“It can take years to build a solid institution. It takes a very short time to mess it up.”