Will it pave the way to a new normal in SA
THE POSITIVE news in the lead-up to the 2018 Budget speech is that the broad macro-economic environment is less confining than this time last year.
The world economy is benefiting from a synchronised cyclical recovery in the US, Europe and Asia, on the back of, among other factors, accelerated trade and investment, improved confidence, and the dissipation of the shock induced by the commodity price collapse.
Closer to home, inflationary concerns have eased, paving the way for a more relaxed monetary policy stance. The recent surge in the value of the exchange rate of the rand has played no small role in this regard. There are also signs of improving business and consumer confidence. And, of course, Jacob Zuma is now a former president.
But while economic growth this year is expected to be a bit firmer than last year, it will hardly be enough to swell the tax base sufficiently to cope with the demands being placed on the fiscus. In the absence of any provision for additional sources of revenue and/or reduction of the government’s spending, the Budget deficit could approach 5percent of GDP.
This is intolerable in the light of the shadow of “junk bond” status. The question, therefore, is not whether tax rates will be raised, but rather which tax rates, and by how much. Whatever announcements are made, there can be little doubt that – directly or indirectly – consumers will bear the brunt of the fiscal profligacy and political largesse that has prevailed for the best part of a decade.
It is against this background that Minister Gigaba will read his first (and in all likelihood his last and only) Budget speech. He will not be presenting a Budget inspired by kakistocracy, but rather one that heralds a return to technocracy, with an emphasis on fiscal rectitude.
This year, however, the business end of the Budget speech will probably take a back seat to the bigger picture; the still unfolding political and leadership revolution that is playing out. By the time the speech is read, President Ramaphosa would have been in power for only a week.
Nonetheless, South African consumers, taxpayers, workers, and business people, as well as international investors and bankers, will be looking at the contents of the Budget speech for clear evidence of a plausible turnaround strategy.
And this is where the real challenge lies. It stands to reason that different stakeholders (vested interests) have different expectations, hopes and desires when they reflect upon the ramifications of the annual Budget speech.
This time the stakes are much bigger – many South Africans are hoping for a vision and mission, and a plan of action that will yield quick and tangible results – a higher growth path, significant job creation, far less inequality, and the reliable delivery of affordable services (not least of which are basic, secondary, and tertiary education).
With the best will in the world, however, one person, one week, and one speech cannot undo a decade of mismanagement and the warped allocation of scarce resources. This is where the crunch lies: Will the Budget speech focus our attention, and that of all the relevant decision and policy makers, on the fundamental issues that need to be addressed to place South Africa on a sustainable and inclusive (ie poverty reducing, job creating) economic growth trajectory of at least 5percent? In this regard, at least three issues come to mind.
First, South Africa has been living beyond its means for far too long. This is evident in the fact that government debt has increased by a factor of almost 5 since 2004, and that household debt has increased almost fourfold over the same period. Moreover, the current account of the balance of payments has been negative in most years since the mid-1990s.
One of the outcomes of this perennial over-spending is a woefully low level of domestic savings. This, in turn, restricts domestic investment expenditure to levels far below those required to produce and sustain meaningful economic growth.
In addition, excess aggregate demand tends to quicken the rate of inflation, unless kept in check by high interest rates. In essence, the country lives in perpetual hope that the various deficits will be financed by non-residents, at an affordable cost.
At times, however, investors find it difficult to formulate compelling reasons to finance South Africa’s fiscal, household, foreign and savings deficits.
The second big issue is that productivity matters – a lot. Productivity growth lies at the heart of economic growth and development. However, productivity growth in South Africa is sluggish, to say the least, for reasons that are well-chronicled.
These include low efficiencies in the use of labour and capital; a variety of challenges (including regulatory and financial barriers) that prevent businesses from maximising their potential; and a low competitive base. Indeed, the entire labour market-employment-education nexus requires a radical transformation.
The third big issue involves the relative decline in institutional capacity and integrity over the past decade.
In the absence of strong institutions the collaborative relationship between the public and private sectors can become dysfunctional.
Trust is therefore eroded and economies can be damaged. It is therefore sobering to note some of the findings of the latest World Economic Forum Global Competitiveness Report.
For instance, in the 2016/17 report South Africa was ranked No1 in the world for Strength of Auditing and Reporting Standards. A year later, that ranking had fallen to 30th.
The country’s ranking for Judicial independence fell from 16th to 36th, while the ranking for Efficacy of Corporate Boards dropped from 3rd to 34th. The ranking for Soundness of Banks fell from 2nd to 37th, while that for Regulation of Securities Exchanges fell from 3rd to 46th.
While there is undoubtedly a measure of subjectivity embodied in these rankings, the severity of the “downgradings” is indicative of the growing concern about the capacity and/or the once-proud integrity of a number of key South African institutions. Further evidence of deleterious effect of alleged unlawful state capture is found in the identification by the Global Competitiveness Report of the three most problematic factors for doing business in South Africa, viz corruption, crime and theft, and government instability/coups.
In conclusion: The minister will, of necessity, present a Budget that tends towards austerity in order to avert any further sub-investment gradings. While the rationalisation of the public service and a restructuring of state-owned enterprises are likely to be part of the commitment to fiscal prudence, the more affluent members of society will probably bear the major burden in the form of higher tax demands.
In many ways, however, the success of this year’s Budget will be measured by its credibility in igniting a renaissance; in heralding a “new normal.” Radical transformation is required to escape from the seductive allure of credit-driven spending; and to revamp labour market arrangements, and the education system. Above all, a restoration of the aesthetic and moral fibre of society is called for, so that normlessness, entitlement, and selfishness give way to ethical behaviour; the eradication of elitism, autocracy, and illegitimacy.
Professor André Roux is an economist at the University of Stellenbosch Business School (USB).