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Budget speech 2018: towards a new normal?

19 February 2018 Prof André Roux, USB
Prof André Roux, economist at the University of Stellenbosch Business School (USB).

Prof André Roux, economist at the University of Stellenbosch Business School (USB).

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 USA, Europe and Asia, on the back of, amongst 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 now goes by the title of former President.

The not so good news is that, 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 fact, in the absence of any provision for additional sources of revenue and/or reduction of government spending, the budget deficit could approach 5% 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. These challenges to the arithmetic of this year’s budget are well-known, and have been well-documented in recent times. 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, so as to prevent the further emasculation of the SA economy.

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 Africa 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 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 in order to place South Africa on a sustainable and inclusive (i.e., poverty reducing, job creating) economic growth trajectory of at least 5%?

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 well-known fact that government debt has increased by a factor of almost 5 since 2004, and the lesser known fact 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. Huge swings in foreign investment flows have, in recent times, resulted in excessive currency volatility.

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 maximizing 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. Together, society’s legal and administrative institutions should form an “enabling environment” for the creation of wealth. This means that institutions are decisive in moulding the prosperity (or lack thereof) of a country. Thus, in the absence of strong institutions the collaborative relationship between the public and private sectors can become dysfunctional, as both sectors then collude in the pursuit of profit at the expense of consumers and taxpayers. 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 number 1 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, both of which are displaying signs of partial dysfunctionality. 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; and the establishment and entrenchment of a shared image of a desired future, with government playing a key visionary role, moulded by foresight and long-term planning.

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